Madras High Court
The Official Liquidator vs Sri. Khaja Mohideen on 19 November, 2021
Author: Senthilkumar Ramamoorthy
Bench: Senthilkumar Ramamoorthy
Comp.A.Nos.150 and 395 of 2019
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED: 19.11.2021
CORAM:
THE HON'BLE MR.JUSTICE SENTHILKUMAR RAMAMOORTHY
Company Application Nos.150 and 395 of 2019
in
Company Petition No.153 of 2002
Comp. A.No.150 of 2019
The Official Liquidator
High Court, Madras
at the Prov. Liquidator of
Madura Cements Limited (in liquidation),
Corporate Bhawan, 2nd Floor,
No.29, Rajaji Salai,
Chennai – 600 001. ... Applicant
Vs.
1.Sri. Khaja Mohideen
2.Sri.M.Abdul Rahim
3.Sr.K.K.Kamal Basha
4.Sr.S.Nazirudin
5.Sr.R.L.Dhanapalan
6.The District Revenue Officer,
Tuticorin District.
7.The Sub-Registrar,
Ettayapuram,
Tuticorin District. ... Respondents
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Comp A. No.395 of 2019
Sri.S.Nazirudin ... Applicant
vs.
1.The Official Liquidator
High Court, Madras
at the Prov. Liquidator of
Madura Cements Limited (in liquidation),
Corporate Bhawan, 2nd Floor,
No.29, Rajaji Salai,
Chennai – 600 001.
2.The Sub-Registrar,
Sub Registrar Office,
Ettayapuram, Tuticorin District.
3.The Sub-Registrar,
Sub Registrar Office,
Ottapidaram, Tuticorin District.
4.The Sub-Registrar,
Sub Registrar Office,
Kadampur, Tuticorin District. ... Respondents
PRAYER IN COMP.A.NO.150 of 2019: This Application is filed under Section
460(4), 536 & 537 of the Companies Act, 1956 r/w the Rules 9 and 11(b) of the
Companies (Court) Rules, 1959 to take this report on record; To cancel the sale
transactions of the landed properties of the company in liquidation during
winding up proceedings as stated in para 8 of the report and declare the sale is
void in terms of Section 536 and 537 of the Companies Act; To direct the
Respondents 6 and 7 herein to cancel the sale transaction of the above said
landed properties of the company in liquidation during the winding up
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proceedings as stated in para 8 of this report and to direct that the cost of
this application do come out of the funds of the company in liquidation.
PRAYER IN COMP.A.NO.395 of 2019: This Application is filed under Order XIV
Rule 8 of the original side rules r/w Rules 9 and 11(b) of the Companies (Court)
Rules, 1959 to validate the sale deeds registered with respective Sub
Registrars as mentioned in the schedule of property.
For Applicant : Mr.Bavisetty Sridhar, Deputy OL
(in Comp. A.No.150 of 2019 and 1st
Respondent in C.A.No.395 of 2019)
For Respondents : Mr.E.Om Prakash, Senior Counsel
for Mr.R.Ravi for R-4 in C.A.No.
150 of 2019 and Applicant in
C.A.No.395 of 2019
Mr.Edwin Prabhakar
Spl Govt. Pleader for R6 and R7 in
C.A.No.150 of 2019 and Respondents
2 to 4 in in C.A.No.395 of 2019
COMMON ORDER
C.A.No.150 of 2019 was filed by the Official Liquidator to cancel specific sale transactions pertaining to the immovable properties of the company in liquidation (the Company) in terms of Sections 536 and 537 of the Companies Act, 1956 (CA 1956). An ex-director of the Company filed 3 of 18 https://www.mhc.tn.gov.in/judis Comp.A.Nos.150 and 395 of 2019 C.A.No.395 of 2019 seeking validation of the above mentioned sale transactions (the Dispositions) in terms of Section 536(2) of CA 1956.
2. About 65 hectares of land were granted to the Company by the Government of Tamil Nadu in order to carry out limestone mining. Pursuant to a request from the company on 17.08.1995, the Government of Tamil Nadu issued G.O.Ms.No.197, Industries (MMDI) Department, dated 07.10.1996, by which permission was granted to the Company to dispose of the unsuitable limestone mines from the Pudhupatti Mines. Pursuant thereto, it appears that a meeting of the then Board of Directors of the Company took place on 10.06.1997. At such meeting, it was resolved to initiate action for the sale of the idle dry land of the Company of an extent of about 66.15 hectares. The Board authorised Mr.S.Nazirudin, Managing Director, to enter into agreements in relation to the sale of the property. Within about eight days, on 18.06.1997, an agreement of sale appears to have been entered into purportedly on behalf of the Company through one S.Khaja Mohideen acting as a power of attorney of the Company. Such agreement of sale is in favour of one K.Abdul Hameed and one Smt.Ayeshabee. The subject matter of such agreement of sale is the sale of unusable mining land to an extent of 65 hectares at Tuticorin District. The 4 of 18 https://www.mhc.tn.gov.in/judis Comp.A.Nos.150 and 395 of 2019 sale consideration specified therein is a sum of Rs.1,32,00,000/-. The said agreement records the receipt of an aggregate sum of Rs.6 lakhs at the time of execution of such agreement of sale. Within about 44 days thereafter, on 30.07.1997, the Board of Directors of the Company made a reference to the Board for Industrial and Financial Reconstruction (BIFR) under Section 15(1) of the Sick Industrial Companies (Special Provisions) Act, 1985 (the SICA). The enclosed Form -A refers to a decision of the Board of Directors on 21.02.1997 to sell the land. The realizable value is indicated therein as Rs.50 lakhs.
3. Meanwhile, the BIFR proceedings continued. Although an operating agency was appointed by the BIFR, it appears that all efforts to rehabilitate the sick industrial company failed. Consequently, by order dated 04.07.2002, the BIFR recommended that the Company be wound up. Pursuant thereto, by order dated 06.03.2006, the Company was ordered to be wound up and the Official Liquidator took charge of the assets and affairs thereof.
4. More than three years subsequent to the date of winding up order, by 7 sale deeds executed between April 2009 and August 2010, the above mentioned 65 hectares of land was conveyed purportedly pursuant to 5 of 18 https://www.mhc.tn.gov.in/judis Comp.A.Nos.150 and 395 of 2019 the agreement of sale dated 18.06.1997. Since the sale deeds were executed subsequent to the commencement of winding up, the Official Liquidator filed an application to cancel the sale deeds. Upon receipt of notice in such application, an ex-director of the Company filed an application seeking validation.
5. The question that arises for consideration is whether the Dispositions are liable to be validated in terms of Section 536(2) of CA 1956. Since the interpretation of Section 536(2) is at the heart of the controversy, the said provision is set out below:-
''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 Court otherwise orders, be void.'' From a plain reading of Section 536(2), it is evident that any disposition of the property of the company or a transfer of shares in the company or alteration in the status of its members, if done after the commencement of winding up, is
6 of 18 https://www.mhc.tn.gov.in/judis Comp.A.Nos.150 and 395 of 2019 void unless the court orders otherwise. In terms of Section 441(2) of CA 1956, as regards companies which are ordered to be wound-up, the winding up of the company is deemed to commence at the time of presentation of the petition for winding up. Consequently, the winding-up of the Company would relate back and commence from the date of presentation of C.P.No.153 of 2002. As a corollary, the winding-up in the present case commenced some time in the year 2002.
6. The ex-director contends that the Dispositions warrant validation since such transactions were entered into in the interest of the Company. Moreover, it is contended that the Dispositions were envisaged as early as in 1997 when the Board of Directors resolved to sell the unusable mining land. Because the Dispositions were envisaged and acted upon in 1997, by entering into an agreement for sale, it is submitted that the Dispositions preceded the commencement of winding up. On behalf of the ex-director, the relevant minutes of the board meeting were placed as also the relevant portion of Form-A, which was filed before the BIFR, whereby the BIFR was informed of the decision to sell the excess mining lands. 7 of 18 https://www.mhc.tn.gov.in/judis Comp.A.Nos.150 and 395 of 2019
7. It is further submitted on behalf of the ex-director that the amounts realised from the Dispositions were used to discharge debts due to secured creditors such as the UCO Bank. Indeed, the ex-director submits that the UCO Bank provided a no due certificate dated 28.06.2011 indicating that the amounts due were settled through compromise on 31.03.2004. By relying on the no due certificate, it is submitted that the Dispositions cannot be said to be against the interest of the Company.
8. In conclusion, in support of the request for validation, several judgments are relied upon. The judgments referred to and relied upon by the ex-director are set out below:
1. Pankaj Mehra and another vs. State of Maharashtra and others (2002) 2 SCC 756 (Pankaj Mehra).
2.V.G.P. Finances Ltd vs. Neptune Inflatables Ltd and another (2013) SCC Online Mad 2914 (V.G.P.Finances).
3. Indian Bank vs. V.G.P. Finances Ltd and others (2008) SCC Online Mad 651.
4. Official Liquidator, High Court of Madras vs. Collector, Vellore District and others (2013) SCC Online Mad 1092.
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9. In response to the said submissions, the Deputy Official Liquidator submits that the impugned sale deeds were executed after the winding-up order was issued. He also submits that all the assets of the Company, including these 65 hectares, were valued by ITCOT thereafter. He points out that claims aggregating to Rs.24,40,33,552.96 were adjudicated by the Official Liquidator and that the aggregate value of the admitted claims is Rs.23,81,34,675.96. An interim dividend at 2% aggregating to Rs.42,24,744 was disbursed collectively to SIPCOT, TIIC, workmen, ESI and the CTO and a further sum of Rs.7,42,739.15 to the Employees Provident Fund Organisation towards provident fund dues. At present, it is submitted that only Rs.9,16,347 is available by way of funds. In these facts and circumstances, the Deputy Official Liquidator seeks rejection of the request for validation.
10. At the outset, it should be noted that a company does not cease to carry on business merely because a winding-up petition is instituted against such company. In course of continuing to carry on business after the presentation of a winding-up petition, dispositions of assets are inevitable.
Such dispositions may be in the ordinary course of business such as the sale of goods that the company concerned is in the business of selling, the making of payments for the procurement of components or raw materials for making such 9 of 18 https://www.mhc.tn.gov.in/judis Comp.A.Nos.150 and 395 of 2019 goods and the like. During such period, it is also possible that dispositions outside the ordinary course of business, such as the sale of an unused but valuable asset, may be effected in order to avert insolvency, discharge liabilities or bolster liquidity. As long as the disposition is bona fide and in the interest of the company concerned, the jurisdictional companies court may exercise the power to validate such transactions. There is little reason, therefore, to whittle down such power, which may be exercised either prior to or after such disposition. Whether such dispositions are void ab initio was considered in Pankaj Mehra. After considering the judgment in Kamani Metallic Oxides Ltd. v. Kamani Tubes Ltd. (1984) 56 Comp Cas 19 (Bom) (Kamani), the Supreme Court concluded that it is not void ab initio, and that the use of the expression “unless the court otherwise orders” dilutes the rigour of the word “void”. In Kamani, the Division Bench of the Bombay High Court held that, if construed as void ab initio, any disposition after commencement of winding-up would be void even if the winding-up petition were to be withdrawn or dismissed subsequently. As indicated therein, upon reading Section 536(2) along with Section 441(2), the only reasonable interpretation is that the legal fiction in Section 441(2) of CA 1956 gets triggered only upon a winding-up order being passed. A logical corollary is that transactions that fall 10 of 18 https://www.mhc.tn.gov.in/judis Comp.A.Nos.150 and 395 of 2019 within the net are void, unless the court orders otherwise, but not void ab initio. In the case at hand, the Dispositions are subsequent to the winding-up order. Therefore, even without recourse to the legal fiction, there is no escaping the fact that the winding-up was underway. Whether a validation order can be passed in such scenario is a question that this case throws up and I propose to circle back to this issue a little later.
11. In V.G.P. Finances, which is one of the judgments relied upon on behalf of the ex-director, this Court considered about 14 judgments with regard to the law on validation of dispositions. Upon analysing the principles laid down in such judgments, the court formulated 8 questions which should be taken into consideration to decide whether a transaction should be validated. Paragraph 30 of the said judgment, which deals with this aspect, is set out below:
''30. As pointed out earlier, my endeavour in an application for validation of a transaction, in terms of Section 536(2) of the Act, should be to see -
(i) Whether the transaction was a bona fide one?
(ii) Whether it was carried out and completed in the ordinary course of current business?
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(iii) Whether it was a case of salvage, of real necessity, to help the company keep going?
(iv) Whether the transferee viz., the applicant herein, was wanting in bona fides, if the test of honesty is applied rather than the test of due care and attention?
(v) Whether the transaction was out of a commercial compulsion to prevent the day-to-day running of the company getting paralysed?
(vi) Whether the transaction was for securing old debts, in order to enable one creditor to score a march over the others?
(vii) Whether this Court would have approved of such a transaction had its permission been sought at the time when the transaction was entered into?
(viii) Whether the price for which the property was alienated was adequate, with reference to its market value?'' The aforesaid questions and the answers thereto would throw considerable light on whether the Dispositions are liable to be validated. However, as would be evident from the discussion that follows, it is not a condition precedent to validation that these tests should be fulfilled cumulatively. For instance, one of the questions is whether the transaction was in the ordinary 12 of 18 https://www.mhc.tn.gov.in/judis Comp.A.Nos.150 and 395 of 2019 course of business. The sale of the immovable assets of a company is not in the ordinary course of business unless such company is in the business of selling immovable assets. Besides, the present Dispositions pertained to the sale of an extremely large extent of about 65 hectares in the aggregate. This was clearly not in the ordinary course of business of the Company. Section 536(2) of CA 1956 is of wide amplitude and it cannot be said that a transaction which is not in the ordinary course of business cannot be validated. However, the threshold for establishing that the transaction was bona fide and in the interest of the company is higher if the transaction is not in the ordinary course of business.
12. By bearing in mind this aspect, the Dispositions should be tested by raising the other questions. For such purpose, the question on valuation is salient. The admitted position is that no valuation report pertaining to the relevant assets are on record. The management of the Company, if acting in the best interest of the Company, should have obtained a valuation report from a credible valuer before undertaking the sale of such a large extent of property. A second aspect to be noticed that the agreement of sale was executed on 18.06.1997, and the reference to the BIFR was made on 30.07.1997, which is less than 45 days thereafter. To put it differently, in less 13 of 18 https://www.mhc.tn.gov.in/judis Comp.A.Nos.150 and 395 of 2019 than 45 days after entering into an agreement of sale for such a large extent of property, the Board of Directors concluded that the net worth of the Company was negative. In addition, while Form – A refers to the Board meeting on 21.02.1997, reference to the agreement of sale dated 18.06.1997 is conspicuous by its absence. While on this issue, it should also be noticed that upon declaring the Company as a sick industrial company under Section 3(1)(o) of the SICA, by order dated 10.10.1997, the BIFR exercised power under Section 22-A of the SICA and prohibited sale of the fixed or current assets of the Company without its consent. A third aspect should also be noticed, namely, that the agreement of sale was not executed by a director of the Company. Instead, it was executed by one Khaja Mohideen acting as a power of attorney of the Company. The Board resolution of 10.06.1997 does not advert to or authorise the appointment of an agent for the sale of the properties of the Company.
13. As regards the sale consideration, the agreement of sale specifies a sum of Rs.1,32,00,000/-. The said agreement of sale does not contain any indication as to how such sale consideration was arrived at for 65 hectares of land. The said sale agreement also contains endorsements. The said endorsements have been made on various dates between 18.06.1997 and 14 of 18 https://www.mhc.tn.gov.in/judis Comp.A.Nos.150 and 395 of 2019 29.01.2010. While the endorsement dated 20.04.2004 indicates that a sum of Rs.64,74,000/- was paid towards OTS to UCO Bank, there are at least two endorsements indicating receipt of payment in cash. It is also pertinent to point out that many of the endorsements pertain to the period subsequent to the commencement of winding-up and even to the winding-up order. The report dated 06.10.2021 of the Deputy Official Liquidator indicates that only 2% of the admitted claims of about Rs.23.81 crore could be discharged from the sale proceeds in course of liquidation. Thus, the Dispositions did not enable the discharge of liabilities to creditors such as SIPCOT and TIIC or even to meet workmen's dues.
14. Keeping in mind the above factual context, I revert to an issue raised earlier: while Section 536 (2) is triggered in respect of all dispositions which are subsequent to the commencement of winding up, can a request for validation be made in respect of dispositions effected after the winding up order was passed? It was contended on behalf of the ex-director that Section 536(2) of the CA 1956 does not contain any limitation as to validation even after a winding up order is passed. On a textual and plain reading of Section 536(2) of CA 1956, the said contention appears prima facie to have some merit. However, Section 536(2) cannot be construed in isolation, 15 of 18 https://www.mhc.tn.gov.in/judis Comp.A.Nos.150 and 395 of 2019 as if it operates in a silo. Once a winding-up order is passed, in terms of Section 456(2) of CA 1956, all the property and effects of the company concerned shall be deemed to be in the custody of the court, and the Official Liquidator is required to take into his custody all the property and actionable claims of the company in terms of Section 456(1) thereof. It is also beyond doubt that the relevant board of directors stands superseded upon a winding up order being issued and, therefore, such directors lose the authority to act on behalf of the company in liquidation. As adverted to earlier, the seven sale deeds were executed on various dates between April 2009 and August 2010. These documents were executed by S.Khaja Mohideen pursuant to a purported power of attorney bearing Document No.1759/2008 dated 26.08.2008. Section 537 (2) of CA 1956 is relevant in this context and provides that any sale, without the leave of the court, of the properties of a company which is being wound-up is void. If Sections 536(2) and 537(2) are read together, unless the Court permits a stakeholder of the company, such as a contributory or ex- director or promoter to sell the assets of the company in liquidation, or dispositions are permitted under law, such as in the case of secured creditors, or the extraordinary circumstances of the case otherwise justify validation, dispositions without the leave of the court after a winding-up order is passed 16 of 18 https://www.mhc.tn.gov.in/judis Comp.A.Nos.150 and 395 of 2019 would not be validated.
15. This Court in V.G.P. Finances formulated a significant test to decide whether a transaction is liable to be validated. The said test is whether the Court would have approved of such transaction had its permission been sought at the time when the transaction was entered into. If the said question were to be posed in relation to the Dispositions, the unequivocal answer would be that such Dispositions would not have been permitted. Therefore, the ex-director has failed to make out a case to validate the Dispositions. On the contrary, the Official Liquidator has established that the Dispositions are liable to be declared void.
16. Accordingly, C.A.No.150 of 2019 is allowed and C.A.No.395 of 2019 is dismissed. The Official Liquidator may file appropriate consequential applications. There will be no order as to costs.
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Index : Yes / No
Internet : Yes / No
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SENTHILKUMAR RAMAMOORTHY J.,
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Comp.A.Nos.150 and 395 of 2019
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