BOMBAY HIGH COURT UPHOLDS TRANSFER OF PROPERTY BY DEBTOR COMPANY TO BUYER, AFTER COMMENCEMENT OF WINDING UP, AS BUYER ESTABLISHED ITS BONA FIDES

In a recent matter of Helbon Engineers Pvt. Ltd. vs Ferral Anant Machinery Manufacturers Pvt. Ltd. and Anr. Interim Application No. 1454 of 2024 in Company Petition No. 924 Of 2003, the Hon’ble Bombay High Court comprising of Justice Abhay Ahuja passed a Judgment dated 10-06-2024 and observed that a bona fide transaction involving sale of property executed by the Respondent-Company (that was undergoing liquidation) in favor of the Applicant, has to be protected during the course of liquidation proceedings, failing which, the Respondent-Company, only by the fact that the process of winding up has started, would benefit itself by unjust enrichment and as such, the same cannot be allowed in law.

Facts

i) In the present case, an ex-parte Order dated 04-02-2005 was passed by the High Court admitting a Winding Up Petition filed by the Petitioner, M/s Jayant Trading Corporation in respect of the Respondent herein, namely, Ferral Anant Machinery Manufacturers Pvt. Ltd. (Respondent-Company).

ii) Around 2006-07, the Applicant, Helbon Engineers Pvt. Ltd., came to know about the Respondent-Company’s intention to transfer its leasehold rights and to sell the structures built on a land that was taken on lease by the Company from Maharashtra Industrial Development Corporation (MIDC) in 1981 (Property).

iii) Thereafter, negotiations ensued between the Applicant and the Company for transfer of the said Property. The Applicant was informed that the said Property was free from all encumbrances and that the same could be transferred to the Applicant for a valuable consideration.

iv) The Applicant issued a Public Notice on 16-02-2007 inviting objections to transfer the said Property, but no objections were received.

v) Hence, the Respondent-Company applied to MIDC for its approval of transfer of the Property in favor of the Applicant, which was granted on 14-08-2007, subject to payment of differential premium of Rs. 5,40,900/- (Rupees Five Lakhs Forty Thousand Nine Hundred only), which was paid by the Applicant.

vi) Thereafter, the Applicant and the Respondent-Company entered into a Sale Deed dated 05-09-2007 for transfer of the said Property in favour of the Applicant for a consideration of Rs.1,25,00,000/- (Rupees One Crore Twenty-Five Lakhs only). As per the Applicant, the said Sale Deed was registered before the Sub-Registrar of Assurances and the entire sale consideration was also paid to the Company.

vii) The Applicant invested substantial sum of money in installing plant and machinery, equipment, raw materials, deploying human resources, etc to use the said Property for its business of manufacturing of electrical transformer tanks, other engineering and fabrication works. The Applicant also mortgaged the said Property to the South Indian Bank Ltd. in 2010 for raising finance of Rs.4,24,00,000/- (Rupees Four Crores Twenty-Four Lakhs only) for establishing the business.

viii) Meanwhile, the High Court passed a Winding-up Order dated 26-07-2010 in respect of the Respondent-Company.

ix) That only when the Official Liquidator for the Company visited the Applicant’s Office on 25-06-2011 and informed the Applicant that he would be taking over possession of the said Property, the Applicant came to know about such Winding-Up Order.

x) Aggrieved, the Applicant filed Company Application No.325 of 2011 in the Winding Up Petition seeking declaration that the Sale Deed dated 05-09-2007 was valid, subsisting and binding. The said Application was later withdrawn with leave to take necessary legal action against the Company in liquidation.

xi) Meanwhile, the Applicant and the Petitioner entered into a Memorandum of Understanding (MOU) dated 06-08-2011, whereby the dues of the Petitioner were settled by the Applicant.

xii) Thereafter, the Applicant filed Regular Civil Suit No.50 of 2011 before the Civil Judge Senior Division at Kalyan seeking declaration that the Sale Deed dated 05-09-2007 was valid, subsisting and binding.

xiii) The Civil Court passed an Interim Order dated 20-03-2012, thereby, restraining the Official Liquidator from dispossessing the Applicant from the said Property.

xiv) The Official Liquidator filed an Application in the Civil Court in the aforesaid Suit on 25-01-2023 under Order VII Rule 11(b) and (d) of Code of Civil Procedure, 1908 (CPC) (Rejection of plaint) for rejection of Plaint, in view of Section 536(2) of Companies Act, 1956 (Avoidance of transfers, etc., after commencement of winding up).

xv) Accordingly, the Civil Court rejected the Plaint filed by the Applicant, vide Order dated 18-08-2023.

Bombay High Court Observations

Aggrieved by the Civil Court’s Order dated 18-08-2023, the Applicant filed an Interim Application No. 1454 of 2024 in Company Petition No. 924 of 2003 before the High Court on 30-08-2023. The High Court, vide Order dated 10-06-2024, observed as follows:

1) That in the present case, although the Sale Deed was executed between the Applicant and the Respondent-Company on 05-09-2007, which was much after the ex-parte Order dated 04-02-2005 admitting the Winding-up Petition was passed by the High Court, but the Applicant established its bona fides by producing evidence that the Applicant, in good faith had executed the Sale Deed and paid the full consideration to the Respondent-Company.

2) That as per Section 536(2) of the Companies Act (Avoidance of Transfers, etc., after commencement of Winding up), in the case of a winding up by a Court, any disposition of property of the company made after commencement of its winding up would be void, unless the Court otherwise orders. The Hon’ble Supreme Court and the High Court, in earlier cases, has interpreted the said provision as follows:

i) “if bonafides are established, then Section 536(2) would not apply, as the said provision is clearly an enabling provision in favour of saving transactions in the interest of justice. That, all transactions which are bonafide and shown to be fair, just and reasonable, deserve to be protected because of clear equity involved in such matters. Section 536(2) declares the transactions after commencement of the winding up void but leaves discretion to the Court to make appropriate orders in that regard. That, the jurisdiction vested is equitable and is meant to be exercised as such. If even bonafide transaction for a consideration would not be protected, then the company, only by the fact that the process of winding up has started, would benefit itself by unjust enrichment. Such a result is clearly to be avoided while exercising power under the said provision.”

ii) “That, if all dispositions of property made by a company in liquidation during the interregnum between the presentation of the petition for winding up and the passing of the order for winding up, would be null and void, that would completely paralyse the business of company as the company has to deal with very many day to day transactions. Such interpretation, as observed by the Hon’ble Supreme Court, could lead to a catastrophic situation which should be averted.”

Conclusion

Therefore, based on the aforesaid observations, the High Court held that as the Applicant as well as the transaction as evidenced by the Sale Deed dated 05-09-2007 are bona fide, hence, it would be fair, just and reasonable to protect such bona fide transaction. As a result, the Application filed by Applicant seeking declaration that the Sale Deed dated 05-09-2007 was valid, subsisting and binding on the Parties was allowed by the High Court.

Further, the High Court passed an Order of Permanent Injunction restraining the Official Liquidator, his servants, agents and representatives etc from disturbing the possession of the Applicant and from taking any action against the Applicant with respect to the said Property.

 

Harini Daliparthy

Lead Senior Associate

The Indian Lawyer & Allied Services