Supreme Court Revives Winding Up Proceedings and Denies Sale Deed: IDBI Bank vs. Official Liquidator (2019)

Date of the Judgment: 17 October 2019

Citation: [Not Available in Source]

Judges: MOHAN M. SHANTANAGOUDAR, J. and AJAY RASTOGI, J.

Can a company’s winding-up petition be dismissed if the original creditor fails to advertise it, even if other creditors remain unsatisfied? The Supreme Court of India recently addressed this question, along with the validity of a prior sale agreement, in a case involving IDBI Bank and the Official Liquidator. The core issue was whether the High Court was correct in reviving the winding up proceedings of a company and denying the execution of a sale deed in favor of IDBI Bank. The two-judge bench of Justices Mohan M. Shantanagoudar and Ajay Rastogi delivered the judgment.

Case Background

Kothari Orient Finance Limited (KOFL) took a working capital loan of Rs. 55 lakhs from United Western Bank (now IDBI Bank) on March 20, 1992. By March 31, 1999, the outstanding amount was Rs. 60.55 lakhs. KOFL defaulted on the loan, and proposed a one-time settlement, offering to sell its property at No. 33, Haddows Road, Nungambakkam, Chennai, to IDBI Bank.

On February 17, 2000, KOFL and IDBI Bank entered into an agreement to sell the property for Rs. 1.05 crores. IDBI Bank paid Rs. 41 lakhs as an advance, with the remaining Rs. 64 lakhs to be paid at the completion of the sale. This was authorized by a resolution dated March 31, 1999, by KOFL’s Board of Directors, which empowered Mr. Pradeep D. Kothari, a director, to execute sale agreements to improve the company’s liquidity. A ‘No Objection Certificate’ for the sale was issued by the income tax authorities on April 18, 2000. KOFL handed over possession of the property to IDBI Bank on November 6, 2000.

Two company petitions, C.P. No. 179 of 2001 and C.P. No. 180 of 2001, were filed on July 2, 2001, by Mr. S. Ramaiah and his wife, seeking the winding up of KOFL under Section 433(e) and (f) and Section 434 of the Companies Act, 1956, due to defaulted deposits. On December 5, 2001, the Company Judge admitted the petitions, noting that KOFL’s liabilities exceeded its assets, and appointed an Administrator and Provisional Liquidator. Directions were issued for publishing the company petitions in newspapers and the Government Gazette.

Timeline

Course of Proceedings

In April 2002, IDBI Bank filed C.A. No. 1208 of 2002, seeking a direction to the Administrator to execute a sale deed for the subject property, as per Section 536(2) of the Companies Act, 1956. The Company Judge dismissed this application on April 21, 2003, stating that the agreement to sell was a fraudulent preference, ignoring other creditors. IDBI Bank’s appeal (O.S.A. No. 284 of 2003) was dismissed by the High Court on August 17, 2009, affirming the fraudulent preference.

Meanwhile, Mr. Pradeep D. Kothari deposited Rs. 4.69 crores to settle unsecured creditors. On June 23, 2009, the Company Judge discharged the Administrator, noting that most unsecured creditors had been paid. On March 3, 2011, IDBI Bank filed C.A. No. 734 of 2011, seeking the discharge of the Official Liquidator. The Company Judge allowed this application on October 4, 2013, and dismissed the original winding up petition (C.P. No. 179 of 2001) due to lack of advertising and no other creditor willing to prosecute it. However, a secured creditor (SBI) approached the Debts Recovery Tribunal (DRT), which ordered the attachment of funds to be returned to KOFL on December 13, 2013.

Mr. Kothari appealed the dismissal of the winding up petition. On July 28, 2017, the High Court revived the winding up proceedings, noting that secured creditors were still unsatisfied. The High Court directed the Official Liquidator to continue the proceedings. This order was challenged by IDBI Bank in the Supreme Court through S.L.P. (Civil) No. 5143 of 2018.

Legal Framework

The case primarily revolves around the interpretation and application of the following legal provisions:

• Section 433(e) and (f) and Section 434 of the Companies Act, 1956: These sections deal with the circumstances under which a company can be wound up by the court, including the inability to pay debts.
• Section 531 of the Companies Act, 1956: This section defines “fraudulent preference” and states that any transfer of property within six months before the commencement of winding up can be deemed invalid if it favors one creditor over others. The provision states:
  
  “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.”
• Section 293(1) of the Companies Act, 1956: This section restricts the powers of the Board of Directors, requiring the consent of the general meeting for the sale of the whole or substantially the whole of the company’s undertaking. The provision states:
  
  “The Board of directors of a public company, or of a private company which is a subsidiary of a public company, shall not, except with the consent of such public company or subsidiary in general meeting ,- (a) sell, lease or otherwise dispose of the whole , or substantially the whole, of the undertaking of the company, or where the company owns more than one undertaking, of the whole, or substantially the whole, of any such undertaking”
• Rule 96, 99, and 24 of the Companies (Court) Rules, 1959: These rules outline the procedure for advertising winding up petitions, ensuring that all stakeholders are notified.
  
  Rule 96 states: “Upon the filing of the petition, it shall be posted before the Judge in Chambers for admission of the petition and fixing a date for the hearing thereof and for directions as to the advertisements to be published and the persons, if any, upon whom copies of the petition are to be served.”
  
  Rule 99 states: “Subject to any directions of the Court, the petition shall be advertised within the time and in the manner provided by rule 24 of these rules.”
  
  Rule 24 states: “Where any petition is required to be advertised, it shall, unless the Judge otherwise orders, or these rules otherwise provide, be advertised not less than fourteen days before the date fixed for hearing, in one issue of the Official Gazette of the State or the Union Territory concerned, and in one issue each of a daily newspaper in the English language and a daily newspaper in the regional language circulating in the State or the Union Territory concerned, as may be fixed by the Judge.”
• Rule 101 of the Companies (Court) Rules, 1959: This rule provides for the substitution of a creditor or contributory for the original petitioner if the original petitioner fails to advertise the petition or prosecute it. The provision states:
  
  “Where a petitioner – … (2) fails to advertise his petition within the time prescribed by these rules or by order of Court or such extended time as the Court may allow … (4) if appearing, does not apply for an order in terms of the prayer of his petition, or, where in the opinion of the Court there is other sufficient cause for an order being made under this rule, the Court may, upon such terms as it may think just, substitute as petitioner any creditor or contributory who, in the opinion of the Court, would have a right to present a petition, and who is desirous of prosecuting the petition.”

Arguments

Arguments by the Petitioner (IDBI Bank):

• The winding up petition should be dismissed because all creditors of KOFL have been satisfied, and no other proceedings are pending.
• The agreement to sell does not constitute a fraudulent preference under Section 531 of the Companies Act, 1956, as it was executed more than six months before the filing of the winding up petition.
• There was no fraudulent intention behind the sale, supported by the ‘No Objection Certificate’ from the Income Tax authorities.
• Section 293(1) of the Companies Act, 1956, does not apply since the subject property is not the whole or substantially the whole of KOFL’s property, and the Board of Directors’ resolution was sufficient.

Arguments by Respondent No. 2 (Official Liquidator):

• The winding up proceedings were correctly revived because several secured creditors of KOFL remain unsatisfied.
• The subject property is the only property of KOFL and cannot be transferred without the approval of the general meeting, as required by Section 293(1) of the Companies Act, 1956.
• The agreement to sell is a fraudulent preference, as the remaining consideration was to be paid only at the time of registration, and the adjustment of the amount was not contemplated in the agreement.

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether the winding up proceedings against KOFL should be revived.
2. In the event that the proceedings should be revived, can a sale deed be executed based on the agreement to sell dated 17.02.2000 entered into by the Petitioner and KOFL.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

How each authority was viewed by the Court?

• The Supreme Court relied on National Conduits (P) Ltd. v. S.S. Arora, AIR 1968 SC 279 and Lt. Col. RK Saxena v. Imperial Forestry Corporation, 2001 CLC 1746 to emphasize the mandatory nature of advertising winding up petitions.
• The Supreme Court cited Suraj Lamp & Industries (P) Ltd. (2) v. State of Haryana, (2012) 1 SCC 656 and Bank of India v. Abhay D. Narottam, (2005) 11 SCC 520 to support the view that the sale of immovable property can only be done through a sale deed.
• The Supreme Court referred to Jayanthi Bai v. Popular Bank Ltd., AIR 1966 Ker 296 and Official Liquidator, Victor Chit Fund (P.) Ltd. v. Kanhiya Lal & Ors., (1972) 42 ComCas 196 (Del) to explain the dominant motive behind a fraudulent preference.
• The Supreme Court used Manik Ratan Guin & Ors. v. Prokash Chandra Chattopadhyay, (1953-54) 58 CWN 545 (Cal) to support its view that Section 531 is comprehensive and includes indirect transactions within its scope.
• The Court considered the provisions of Section 433(e) and (f) and Section 434 of the Companies Act, 1956 to understand the grounds for winding up.
• The Court interpreted Section 531 of the Companies Act, 1956 to determine what constitutes a fraudulent preference.
• The Court applied Section 293(1) of the Companies Act, 1956 to assess the requirement for a general meeting’s consent for the sale of the company’s property.
• The Court analyzed Rule 96, 99, and 24 of the Companies (Court) Rules, 1959 to understand the procedure for advertising winding up petitions.
• The Court examined Rule 101 of the Companies (Court) Rules, 1959 to understand the provision for substituting a creditor for the original petitioner.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• Mandatory Nature of Advertisement: The Court emphasized that the advertisement of winding up petitions is mandatory to ensure that all stakeholders are aware of the proceedings. The failure to advertise the petition as per the 1959 Rules was a significant factor in the decision to revive the winding up proceedings.
• Protection of Creditors’ Interests: The Court was concerned that the dismissal of the winding up petition would prejudice the secured creditors of KOFL, who were still unsatisfied. The Court noted that these creditors were not given the opportunity to step into the shoes of the original petitioning creditor.
• Compliance with Section 293(1): The Court held that the sale of the subject property required the consent of the general meeting of KOFL under Section 293(1) of the Companies Act, 1956, as it was the only immovable property of the company. This requirement was not met, which led to the denial of the execution of the sale deed.
• Time Limit under Section 531: The Court noted that the agreement to sell was executed more than six months before the filing of the winding up petition and therefore, it cannot be termed as a fraudulent preference.

Logical Reasoning:

Final Decision

The Supreme Court dismissed both Special Leave Petitions (SLP) filed by IDBI Bank: S.L.P. (Civil) No. 5143 of 2018 and S.L.P. (Civil) No. 33825 of 2009. The Court upheld the High Court’s decision to revive the winding up proceedings against KOFL and denied the execution of the sale deed in favor of IDBI Bank. The Official Liquidator was directed to continue the winding up proceedings.

Implications

The Supreme Court’s judgment has significant implications for similar cases involving the winding up of companies and the execution of sale agreements. The key takeaways are:

• Mandatory Compliance with Procedural Rules: The judgment underscores the importance of strictly adhering to the procedural rules for advertising winding up petitions. Failure to do so can lead to the revival of proceedings, even if they were previously dismissed.
• Protection of Secured Creditors: The Court’s decision highlights the need to protect the interests of all creditors, especially secured creditors, in winding up proceedings. The court will ensure that all creditors have the opportunity to participate in the process.
• Compliance with Section 293(1): The case emphasizes the necessity of obtaining the consent of the general meeting for the sale of a company’s whole or substantially the whole undertaking, as required by Section 293(1) of the Companies Act, 1956.
• Importance of Sale Deed: The judgment reiterates that the sale of immovable property can only be done through a sale deed and an agreement to sell does not transfer any right, title or interest in the immovable property.

Summary

Case: IDBI Bank Limited vs. The Official Liquidator, Office of the Official Liquidator of Companies & Anr.

Key Facts:

• KOFL defaulted on a loan from IDBI Bank.
• KOFL and IDBI Bank entered into an agreement to sell the property.
• Winding up petitions were filed against KOFL.
• The winding up petition was dismissed by the Company Court but was revived by the High Court.

Key Issues:

1. Whether the winding up proceedings against KOFL should be revived.
2. Whether a sale deed can be executed based on the agreement to sell.

Court’s Decision:

• The Supreme Court upheld the High Court’s decision to revive the winding up proceedings.
• The Supreme Court denied the execution of the sale deed in favor of IDBI Bank.

Implications:

• Mandatory compliance with procedural rules for winding up petitions.
• Protection of the interests of all creditors, especially secured creditors.
• Compliance with Section 293(1) of the Companies Act, 1956, for the sale of a company’s undertaking.
• The sale of immovable property can only be done through a sale deed.