Madras High Court
Indian Bank vs M/S.V.G.P.Finance Limited on 9 September, 2008
Author: M.Chockalingam
Bench: M.Chockalingam, M.Venugopal
IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 9-9-2008 CORAM THE HONOURABLE MR.JUSTICE M.CHOCKALINGAM AND THE HONOURABLE MR.JUSTICE M.VENUGOPAL O.S.A.Nos.201, 210 and 211 of 2005 and CMP Nos.14739, 14740, 15216, 15217, 15218 and 15219/2005 Indian Bank rep. By its Assistant General Manager Asset Recovery Management Branch II, 55 (Old No.24/2), Ethiraj Salai Chennai 600 008. .. Appellant in OSA 201/2005 M/s.Paridi Plastronics Rep. By its Proprietor No.10, Facitasia Road Kandansavadi Perunkudi, Chennai 600 096. .. Appellant in OSA 210/2005 Classic Marketing Rep. By its Managing Partner Near ASP Office Main Road, Tullissery Kerala 670 101, T.Sahir .. Appellant in OSA 211/2005 vs 1.M/s.V.G.P.Finance Limited a Company incorporated under the Companies Act, 1956 and having its registered office at Victory House 39, Anna Salai Chennai 600 001. 2.The Official Liquidator High Court, Madras Kuralagam Block I, First Floor Esplanade, Chennai 600 108. .. Respondents in all appeals Original side appeals preferred under Order XXXVI Rule 11 of O.S. Rules read with Clause 15 of Letters Patent against the order of this Court dated 9.8.2005 in C.A.No.1275 of 1999 in C.P.No.201 of 1996. For Appellants : Mr.Jayesh B.Dolia for M/s.Aiyar & Dolia for appellant in OSA 201/2005 Mr.M.Murali for appellant in OSA 210/2005 Mr.P.Rathinamani for appellant in OSA 211/2005 For Respondents ; Mr.R.Krishnamoorthy Senior Advocate for Mr.Shivakumar for R1 Mr.Babu for Official Liquidator for R2 COMMON JUDGMENT
(Judgment of the Court was delivered by M.CHOCKALINGAM, J.) This appeal has arisen from an order of the learned Single Judge of this Court made in C.A.No.1275 of 1999 in C.P.No.201 of 1996.
2.The case of the first respondent/applicant is as follows:
The applicant is a secured creditor of Neptune Inflatables Limited which was wound up as per the order of the Court dated 10.3.1999. When the said company approached the applicant for loan facilities, the applicant had extended the same to the tune of Rs.65.20 lakhs. The company in liquidation had mortgaged the schedule mentioned property. The charge created was duly informed to the Registrar of Companies, and the same was registered also. At that juncture, the company in liquidation wanted to sell the property in order to discharge the portion of the credit facilities out of commercial compulsion. Accordingly, the company had conveyed the property to the applicant by way of two sale deeds dated 11.2.1999 and 16.2.1999, and put them in absolute possession of the property. In the meanwhile, the applicant received a letter from the Official Liquidator about the winding up of the company and also about taking possession of the schedule property. The applicant raised objection. Despite the same, the Official Liquidator over locked the premises. Hence the applicant filed CA No.1275/99 for directing the Official Liquidator to deliver possession of the property. The said application was dismissed for default on 14.8.2002. The applicant came to know that the application was not the proper remedy and necessary application to validate the disposition of the property by the Court has to be filed. Accordingly, the applicant filed an application. The applicant is having financial problems and has to pay the dues to the depositors. Under the circumstances, the transaction made by the company in liquidation in favour of the applicant has got to be validated and the Official Liquidator be directed to deliver vacant possession of the property.
3.The Official Liquidator opposed the application by stating that the sale deeds are not bona fide; that all the transactions are void in terms of Sec.536(2) of the Companies Act, and hence the application was to be dismissed.
4.The learned Single Judge on enquiry, has allowed the application directing the Official Liquidator to deliver possession of the property in question to the applicant. Hence this appeal.
5.Arguing for the appellants, the learned Counsel would submit that besides the first respondent herein, the company in liquidation had other secured and unsecured creditors to whom the Company owed certain amounts; that the appellant Indian Bank had got first charge over the plant and machineries and other movables belonging to it; that the learned Single Judge arrived at a decision without any evidence being let in by the parties; that in this case, notice should have been issued to the secured and unsecured creditors; that the provisions of Sec.536(2) of the Companies Act should have been considered; that while allowing the company, the secured creditors like the appellants and the workmen of the Company in liquidation have been denied their legitimate dues; that while deciding the issue as to the declaration of transfer during the pendency of the company petition namely whether it is void or not, the parties should be given opportunity to let in evidence, but not done so; that in the absence thereof, the transfer of the property shall be held to be invalid and void ab initio, and under the circumstances, the order of the learned Single Judge has got to be set aside.
6.The learned Senior Counsel appearing for the first respondent would submit that the entire transaction of the first respondent is bonafide; that the appellant Indian Bank admittedly not having any charge over the said immovable property cannot question the validation of the bonafide transaction as found by the learned Single Judge; that the rights of any secured creditor has to be individually safeguarded; that the Companies Act does not envisage that the exclusive security of a secured creditor has to be shared among all the creditors, since the individual secured creditor has the option of standing outside the winding up, even post winding up to realise its security; that the only statutory exception is the fictional statutory pari passu charge under Sec.529 A; that the Indian Bank does not belong to the class of secured creditors covered under Sec.529 A (1)(b); that its position would not improve more than security created in its favour; that its priority would not extend to its entire unrealised sums, which might be in excess of its security; that the appellants have been keeping quiet for all these years; that the appeals have been filed with ulterior motives; that it is well known that the equity favours the vigilant and not the indolent; that under the circumstances, the learned Single Judge was perfectly correct in allowing the application, and hence that order has got to be sustained and all the appeals be dismissed.
7.The Court also heard the Official Liquidator.
8.The admitted facts are as follows:
The company in liquidation which was wound up as per the order dated 10.3.1999 in C.P.No.201/96, approached the applicant, the first respondent herein, for certain loan facilities in order to extend its business activities. Accordingly, the applicant gave loan facilities to the company to the tune of Rs.65,20,000/- consisting of Rs.10 lakhs, Rs.25 lakhs, Rs.25 lakhs and Rs.5.20 lakhs and also other bill discount and lease facilities. In order to secure the same, the company in liquidation mortgaged the property situated in Door No.135, Mottaikaran Chavadi, Okkiyam-Thoraipakkam Village, Tambaram Taluk, which is described in the Schedule. The charge created was duly intimated to the Registrar of Companies on 5.2.1997, and the same was accordingly registered. Since the company could not make repayment proper, it came forward to sell the schedule property in order to discharge a part of the said credit facilities. Accordingly, the company executed two sale deeds dated 11.2.1999 and 16.2.1999 whereby the schedule property was conveyed to the applicant. Thus, the applicant took absolute possession of the property. Pursuant to the order of winding up dated 10.3.1999, the Official Liquidator by a communication dated 1.6.1999 informed the applicant about the same and also about the taking possession of the property. Accordingly, the Official Liquidator visited the schedule property on 8.6.1999, when the applicant put forth its objection from taking possession. Thereafter, the Official Liquidator took possession of the property and recorded the minutes. The applicant filed C.A.No.1275 of 1999 for directing the Official Liquidator to deliver possession of the property. That application was dismissed for default on 14.8.2002. The above application was not filed seeking proper remedy and hence necessary application to validate the above conveyance of the property was to be filed. Accordingly, application was filed for the said relief. C.A.No.1275 of 1999 was dismissed on 29.11.2004 against which the applicant filed OSA No.13 of 2005. The said appeal was allowed by a Division Bench of this Court remitting the matter back for fresh consideration and observing that the learned Single Judge should consider the question whether the transaction would be valid or not on the basis of the evidence that might be let in by the parties. Accordingly, C.A.No.1275 of 1999 was taken up for consideration by the learned Single Judge and as a result, the application was allowed directing the Official Liquidator to deliver vacant possession of the property to the applicant. This order dated 9.8.2005, is the subject matter of challenge in this appeal.
9.The prime contention put forth by the applicant before the learned Single Judge and also as the first respondent before this Court is that the sale transactions covered under the aforesaid two sale deeds, were bonafide; that all the transactions are not void ab initio in terms of Sec.536(2) of the Companies Act, and hence it cannot be declared as void by the Court; that the entire consideration for the conveyance of the property was actually paid to the company by way of cheques and payments, and hence it was a bonafide transaction which would not fall under the mischief of Sec.536(2) of the Companies Act; and that under the circumstances, a direction has got to be given to the Official Liquidator to hand over possession of the property. On the contrary, the stand that was taken by the Official Liquidator before the learned Single Judge was that the transactions were not bonafide; that they were void in terms of sub-section (2) of Section 536 of the Companies Act; that the company petition was filed on 14.10.1996; that the charge was created by executing mortgage deed on the property only on 31.1.1997; that the sale deeds have been executed on 11.2.1999 and 16.2.1999; but, the company was ordered to be wound up on 13.3.1998 itself, and under the circumstances, the transactions are neither bonafide and hence the possession which was taken by the Official Liquidator, was proper.
10.As could be seen above, the petition for winding up was presented before the Court on 14.10.1996. The company had mortgaged the property on 31.1.1997 in favour of the applicant by depositing the title deeds pursuant to the earlier lease agreement. The charge created by the company was duly informed to the Registrar of Companies on 5.2.1997 and the same was also registered. The company in liquidation has executed two sale deeds on 11.2.1999 and 16.2.1999 in respect of the landed property in question. The company by an order of Court was wound up on 10.3.1999. From the above, it would be quite clear that both the mortgage deeds and sale deeds were executed by the company in liquidation in favour of the applicant after the filing of the company petition for winding up and before the order of winding up and hence pursuant to the order of winding up, the Official Liquidator took delivery of possession of the property on 8.6.1999. The applicant filed an application in C.A.No.1275 of 1999 seeking re-delivery of the property. On dismissal of the application, the applicant filed OSA No.13 of 2005 whereby the order of the learned Single Judge was set aside and an order of remittal was made which reads as follows:
"9.Though the application has been filed for delivering possession, we are of the view that since the Official Liquidator has taken over possession, he is permitted to retain the possession and it is not necessary for him to redeliver the possession to the appellant company. Further, as already held, the question whether the transfer is valid or void has to be examined. It is needless to say that it is always open to the learned Single Judge to permit the parties to lead evidence.
10.In the result, the matter is remitted back for fresh consideration. No costs."
The learned Single on remittal was required to decide the question whether the transfer was valid or void. The learned Single Judge has taken the view that the sale transactions were valid, and hence these three appeals have arisen.
11.At the outset, it has to be pointed out that these three appellants never appeared as parties before the learned Single Judge. It was contended by the appellants' side that the Official Liquidator who took delivery of possession of the property pursuant to the order of winding up, has actually represented the entire body of creditors. All the three appellants called themselves as secured creditors. As far as the appellant in OSA No.201 of 2005 namely Indian Bank, was concerned, what was hypothecated to Indian Bank for raising loans by the company under liquidation though earlier in point of time, was certain movables and also machineries. What were actually mortgaged and conveyed under the deeds were the immovable properties namely the lands. Further when the Official Liquidator visited the property on 8.6.1999, the Indian Bank was also very well available. Along with the applicant, the Indian Bank also raised its objections, but it never raised its little finger all along the years and was keeping quiet and has now preferred an appeal after the order of redelivery was made.
12.All these three appeals concentrate on the question whether the deeds of mortgage and sale executed by the company under liquidation after the filing of the petition for winding up and before the order of winding up, could be termed as void or otherwise in terms of Sec.536(2) of the Companies Act. It would be more apt and appropriate to reproduce Sec.536(2) of the Companies Act as follows:
"536: Avoidance of transfers, etc., after commencement of winding up:-
(1)....
(2)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."
13.Placing reliance on the above provision, the learned Counsel for the appellants would contend that for winding up of the company, the petition was filed on 14.10.1996; that the said date shall be taken as the date from which winding up proceedings were commenced for the purpose of applicability of the above said provision, and so the sale deeds executed on 11.2.1999 and 16.2.1999 by the company under liquidation, are void in terms of Sec.536(2) of the Act. On the contrary, it is contended by the first respondent's side that every transfer that is made even after the commencement of the winding up proceedings, the same would not by itself become void ab initio or void, and the transaction in question would fall under the clause "unless the Tribunal otherwise orders" since the transactions were bonafide. The Apex Court had an occasion to consider whether and under what circumstances a transfer made even after the commencement of the winding up proceedings, could be avoided in a case reported in (2000) 2 SUPREME COURT CASES 756 (PANKAJ MEHRA AND ANOTHER V. STATE OF MAHARASHTRA AND OTHERS) wherein it has been held as follows:
"14. In the above backdrop alone we can consider the impact of the legislative direction in Section 536(2) that any disposition of the property of the company made after the commencement of the winding up (i.e. after the presentation of a petition for winding up) shall be void. There are two important aspects here. First is, that the word void need not automatically indicate that any disposition should be ab initio void. The legal implication of the word void need not necessarily be a stage of nullity in all contingencies. Blacks Law Dictionary gives the meaning of the word void as having different nuances in different connotations. One of them is of course null, or having no legal force or binding effect. And the other is unable in law, to support the purpose for which it was intended. After referring to the nuances between void and voidable the lexicographer pointed out the following:
The word void in its strictest sense, means that which has no force and effect, is without legal efficacy, is incapable of being enforced by law, or has no legal or binding force, but frequently the word is used and construed as having the more liberal meaning of voidable.
The word void is used in statutes in the sense of utterly void so as to be incapable of ratification, and also in the sense of voidable and resort must be had to the rules of construction in many cases to determine in which sense the legislature intended to use it. An act or contract neither wrong in itself nor against public policy, which has been declared void by statute for the protection or benefit of a certain party, or class of parties, is voidable only.
15. For discerning the legislative idea in employing the word void in the context set out in Section 536(2) of the Companies Act the second aspect to be noticed is that the provision itself shows that the word void is not employed peremptorily since the court has power to order otherwise. The words unless the court otherwise orders are capable of diluting the rigour of the word void and to choose the alternative meaning attached to that word.
16. In Chittoor Distt. Coop. Marketing Society Ltd. v. Vegetols Ltd. a two-Judge Bench of this Court considered a plea for validation of payments made by a company after presentation of a petition for winding up. One set of payments were made before the passing of the winding-up order and the other set of payments were made thereafter. This Court declined to validate such payments on the ground that there is no evidence to show that these payments were made either under compulsion of circumstances in order to save or protect the property of the company or that there was any commercial compulsion to enable it to run its business. (SCC p. 169, para 4) The decision only indicates that such payments could have been made valid if evidence was adduced to show that there was compulsion of circumstances. In fact, this decision lends support to the interpretation that the payments which were made after the commencement of winding-up proceedings, would not become ab initio void.
17. An early decision of a Division Bench of the Bombay High Court in Tulsidas Jasraj Parekh v. Industrial Bank of Western India was sought to be relied on by most of the learned counsel who argued for different appellants. The question which the Court considered therein pertained to Section 227(2) of the old Companies Act, 1913 which was identical to Section 536(2) of the present Act. Certain payments made by a company after commencement of the winding-up proceedings were questioned and the Division Bench considered the scope of the sub-section and noticed that the principle had been borrowed from the English Companies Act. Hence some of the English authorities were also referred to by Marten, C.J., who spoke for the Division Bench. Learned Judges stated thus:
Now here as regards Section 227(2) the Court has to steer a middle course between two extremes. On the one hand the words of the section are wide enough to include any sale or payment that a company may make after the date of the winding-up petition. On that basis any business would practically have to be stopped if a petition was presented, because it would be unsafe to dispose of any of the companys assets. For instance, a mill company might not be able to buy a ton of coal for the use of its furnaces, or, on the other hand, it might not be able to sell any of its goods in the ordinary course of business. Consequently, the Court has very properly laid down that, speaking generally, any bona fide transaction carried out and completed in the ordinary course of current business will be sanctioned by the Court under Section 227(2). On the other hand it will not allow the assets to be disposed of at the mere pleasure of the company, and thus cause the fundamental principle of equality amongst creditors to be violated. To do so would in effect be to add to the preferential debts enumerated in Section 230 a further category of all debts which the company might choose to pay wholly or in part.
18. It is useful to refer to the reasoning adopted by a Division Bench of the Gujarat High Court in Navjivan Mills Ltd., In re in favour of adopting a pragmatic attitude when a Company Court was approached for approval of certain dispositions which a company made after presentation of a petition for winding up. A clear distinction was drawn by the Division Bench between the period till the passing of the order for winding up and thereafter, so far as dispositions are concerned. The following reasoning is useful for consideration of the issues involved:
The court can exercise the jurisdiction under Section 536(2) of the Companies Act, 1956, of giving directions validating proposed transactions pending a petition for winding up but before the winding-up order is made for the obvious reason that unless these transactions are saved from the consequence which may ensue, if at all, on an order of winding up being made, the company might find it difficult to keep itself going and its business might be paralysed. The purpose underlying the investment of the power in court is for the benefit and the interest of the company so as to ensure that a company which is made the subject of a winding up petition may nevertheless obtain the money necessary for carrying out its business and so as to avoid its business being paralysed. If that is the purpose and object of the section, it would hardly be proper and just to stultify the power and restrict its operation since otherwise it is bound to be counterproductive in the sense that the very purpose of keeping the company as a going concern so as to ensure the interest of the shareholders and creditors would be defeated.
19. In Grays Inn Construction Co. Ltd., Re the Court of Appeal (Civil Division) considered the principle on which discretion of the court to validate the dispositions of property made by a company, during the interregnum between presentation of a winding up petition and the passing of the order for winding up, has been dealt with. Section 227 of the English Companies Act, 1948 is almost the same as Section 536(2) of the Indian Companies Act. Dispositions which could be validated are mentioned in the decision. The said decision was cited before us in order to emphasise the point that courts would be very circumspect in the matter of validating the payments and the interest of the creditors as well as the company would be kept uppermost in consideration. Be that so, the said decision is not sufficient to support the contention that disposition during the interregnum would be irretrievably void.
20. It is difficult to lay down that all dispositions of property made by a company during the interregnum between the presentation of a petition for winding up and the passing of the order for winding up would be null and void. If such a view is taken the business of the company would be paralysed, for the company may have to deal with very many day-to-day transactions, make payments of salary to the staff and other employees and meet urgent contingencies. An interpretation which could lead to such a catastrophic situation should be averted. That apart, if any such view is adopted, a fraudulent company can deceive any bona fide person transacting business with the company by stage-managing a petition to be presented for winding up in order to defeat such bona fide customers. This consequence has been correctly voiced by the Division Bench in the impugned judgment."
14.From the above decision rendered by the Apex Court, it would be abundantly clear that all transactions done subsequent to the commencement of the winding up proceedings are neither void ab initio nor could be declared as void. The words "unless the Tribunal otherwise orders" would be quite indicative of the legislative intention that though the transactions entered into subsequent to the commencement of the winding up proceedings, it can be declared valid. It is a cardinal principal of construction that normally no word or provision should be considered redundant or superfluous in interpreting the provisions of the statute. The interpretation should advance the legislative intent and serve the purpose for which it was made rather than to frustrate it. In order to find out whether the transaction is void or not, the Court has to necessarily look into the circumstances and the sequence of events and should also test whether the transaction was bonafide or otherwise. In the case on hand, from the materials available it could be seen that it is not in controversy that the company in liquidation passed a resolution in the Annual General Meeting to avail loan, to create mortgage and to dispose of the assets by way of sale even on 29.9.1995 itself. The loan agreement was entered into between the company in liquidation and the applicant on 1.12.1995, and the loan facilities were availed by the company in liquidation to the tune of Rs.65.20 lakhs consisting of Rs.10 lakhs, Rs.25 lakhs, Rs.25 lakhs and Rs.5.20 lakhs even before the filing of the company petition for winding up on 14.10.1996. The said facts namely the loan agreement and the loan facilities to the extent of Rs.65.20 lakhs were raised accordingly by the company in liquidation from the applicant even before the filing of the winding up petition are not disputed either by the Official Liquidator before the learned Single Judge or by the appellants before this Court. It is true that as security for the loan raised, the company under liquidation has executed the mortgage deed on 31.1.1997. The same was also reported to the Registrar of Companies and registered also on 5.2.1997. Following the same, two sale deeds dated 11.2.1999 and 16.2.1999, were executed conveying the immovable property to the first respondent. Thus, the passing of the resolution by the company under liquidation, entering into the agreement therefor and raising the entire loan of Rs.65.20 lakhs were all 10 months prior to the filing of the petition for winding up.
15.Now, at this juncture, it is pertinent to point out that these loan transactions could not have been entered into for the purpose of defeating or defrauding the creditors. Nowhere the Official Liquidator came out with the case stating that the said loan transactions were entered into in order defeat or deceit the secured creditors. From the resolution passed for raising loan facility and even if necessary, to part with the properties of the company, it would be indicative of the fact that the company was in financial needs. It is true that in the agreement for raising loans, entered into between the applicant and the company in liquidation, it was not stated that the loan was raised for day to day transactions. But, it should not be forgotten that the company in liquidation was carrying on its business even at the time of the filing of the winding up petition and also till the winding up order was made. Their Lordships of the Apex Court in the aforementioned case have pointed out that the purpose underlying the investment of the power in court is for the benefit and the interest of of the company so as to ensure that a company which is made the subject of a winding up petition may nevertheless obtain the money necessary for carrying out its business and so as to avoid its business being paralyzed. It is also pointed out that if that was the purpose and object of the section, it would hardly be proper and just to stultify the power and restrict its operation since otherwise it was bound to be counterproductive in the sense that the very purpose of keeping the company as a going concern so as to ensure the interest of the shareholders and creditors would be defeated.
16.Applying the principle laid down by the Apex Court in the aforesaid decision and taking into consideration the sequence of events and the facts and circumstances attendant, this Court is of the view that the transactions entered into, are bonafide. So long as the Court is able to see bonafide transactions, no doubt it would fall within the clause "unless the Tribunal orders otherwise", and hence these transactions cannot be declared as void under Sec.536(2) of the Companies Act. Therefore this Court has M.CHOCKALINGAM, J.
AND M.VENUGOPAL, J.
nsv/ to necessarily affirm the order of the learned Single Judge.
17.In the result, these original side appeals are dismissed confirming the order of the learned Single Judge and leaving the parties to bear their costs. Consequently, connected CMPs are also dismissed.
(M.C.,J.) (M.V.,J.) 9-9-2008 Index; yes Internet: yes nsv/ OSA Nos.201, 210 and 211 of 2005