Idbi Bank Limited through Dgm (Legal) vs The Official Liquidator, Office of the Official Liquidator of Companies & Anr.

Companies Act, 1956: ss.293, 531 – Whether the agreement to sell executed by KOFL in favour of petitioner amounted to fraudulent preference and consequently whether the petitioner has a right to seek the execution of sale deed in its favour – Held: s.531 is a provision that deals with the effect of winding up of a company on its antecedent transactions – It provides that a transfer or any other act done in relation to the property of a company within a period of six months before the commencement of its winding up (“twilight period”) shall be deemed to be a fraudulent preference of its creditors and accordingly be invalid – In the instant case, s.531 should be read in conjunction with s.293, which stipulates that the sale of the whole, or substantially the whole of the property of a public company requires the consent of its general meeting – s.531 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 – 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 company – s.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 – s.293(1) is applicable to the instant 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 was obtained – There was only a Board resolution 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 s.293(1) – A bare reading of s.531 shows that in addition to any transfer of property, it covers “any other act relating to the property” – These terms indicate that s.531 is comprehensive and includes indirect transactions within its scope – The Petitioner is not precluded from benefiting from s.531 on account of non-fulfilment of the six-month condition – Therefore, the agreement to sell cannot be termed as a fraudulent preference under s.531.

Transfer of property: It is 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.

Dismissing the Special Leave Petitions, the Court HELD: 1. From a reading of Rules 96, 99, and 24, it is clear that the advertisement of a winding up petition is mandatory. In the event that the petitioning creditor fails to advertise the petition within the prescribed time, Rule 101 accords the Court with the discretion to substitute such petitioning creditor with another creditor or contributory, if the latter is capable and desirous of prosecuting the winding up petition. The winding up proceedings are proceedings in rem and have an impact on the rights of people, in general. 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. Given the absence of a specific provision mandating that the petition only be advertised by petitioning creditor, 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. [Para 8, 11.3] [561-B; 562-G-H; 563A-C]

2. 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. Further, upon learning of the decision of the Company Judge dismissing the winding up petition, one of the secured creditors (SBI) also approached the DRT to secure its interest. Based on this, 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. 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. Therefore, given that the secured creditors of KOFL have still not been satisfied and are bound to be affected by any order dismissing the winding up proceeding, the decision of the Division Bench reviving C.P. No. 179 of 2001 is upheld and the Company Court is directed to issue appropriate directions to the Official Liquidator for publishing the advertisement of the proceedings in accordance with law. The other winding up petition, C.P. No.

180 of 2001 filed by the wife of Respondent No. 3 continues to remain on record, as the impugned proceedings pertain to C.A. No. 734 of 2011, which was filed in C.P. No. 179 of 2001 only. The impugned judgment and decree does not contain any direction qua C.P. No. 180 of 2001, which shall therefore remain unaffected. [Paras 11.4-11.7] [563-D-H; 564-A-C]

3. Section 531 is a provision that deals with the effect of winding up of a company on its antecedent transactions. It provides that a transfer or any other act done in relation to the property of a company within a period of six months before the commencement of its winding up (“twilight period”) shall be deemed to be a fraudulent preference of its creditors and accordingly be invalid. For the purpose of the present case, Section 531 should be read in conjunction with Section 293, which stipulates that the sale of the whole, or substantially the whole of the property of a public company requires the consent of its general meeting. 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. Section 293(1) 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, C.A. No. 1208 of 2002 deserves to be dismissed on this ground alone. [Para 14, 17.1] [565-B-C; 566F-H; 567-A-B]

Suraj Lamp & Industries (P) Ltd. (2) v. State of Haryana, (2012) 1 SCC 656 : [2011] 11 SCR 848 ; Bank of India v. Abhay D. Narottam, (2005) 11 SCC 520 – relied on

4. The 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. 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 company. [Para 17.2] [567-C-E] Jayanthi Bai v. Popular Bank Ltd., AIR 1966 Ker 296; Official Liquidator, Victor Chit Fund (P.) Ltd. v. Kanhiya Lal & Ors., (1972) 42 Com Cas 196 (Del) – approved

5. 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. The same cannot be disregarded as it is crucial for ensuring commercial certainty for parties transacting with a company. Section 531 is comprehensive and includes indirect transactions within its scope. Thus, the Petitioner is not precluded from benefiting from Section 531 on account of non-fulfilment of the six-month condition. Therefore, the agreement to sell dated 17.02.2000 cannot be termed as a fraudulent preference under Section 531. [Paras 17.3-17.5] [567F-H; 568-A-D] Manik Ratan Guin & Ors. v. Prokash Chandra

Chattopadhyay, (1953-54) 58 CWN 545 (Cal); National Conduits (P) Ltd. v. S.S. Arora, AIR 1968 SC 279 : [1968] SCR 430; Lt. Col. RK Saxena v. Imperial Forestry Corporation, 2001 CLC 1746 –relied on