IDBI BANK LIMITED THROUGH DGM (LEGAL) versus THE OFFICIAL LIQUIDATOR, OFFICE OF THE OFFICIAL LIQUIDATOR OF COMPANIES & ANR. on 17 October 2019

IDBI BANK LIMITED THROUGH DGM (LEGAL)

v.

THE OFFICIAL LIQUIDATOR, OFFICE OF THEOFFICIAL LIQUIDATOR OF COMPANIES & ANR.

(Special Leave Petition (Civil) No. 33825 of 2009)

OCTOBER 17, 2019

[MOHAN M. SHANTANAGOUDAR ANDAJAY RASTOGI, JJ.]

Company (Court) Rules, 1959: rr.96, 99, 24 and 101 –Winding up petitions, advertisement – Mandatory requirement –Held: The advertisement of a winding up petition is mandatory –However, if the petitioning creditor fails to advertise the petitionwithin the prescribed time, r.101 accords discretion to the court tosubstitute such petitioning creditor with another creditor orcontributory, if latter is capable and desirous of prosecuting thewinding up petition – In the instant case, no such advertisementwas made – No other creditor or contributory expressed willingnessto prosecute the original winding up petition – At the same time, asnoted by the Division Bench of High Court, there were otherunsatisfied secured creditors of KOFL who were not given the optionto step into the shoes of the petitioning creditor in terms of r.101 –Given the absence of a specific provision mandating that the petitiononly be advertised by petitioning creditor, the Company Court hasthe discretion to direct the publishing of an advertisement to securethe interest of other creditors – In such situations, the winding upproceedings cannot be dismissed, as it would frustrate the veryobjective of securing the interest of all creditors – Clearly, thesubmission for the Petitioner that the winding up petition deservesto be dismissed as all creditors of KOFL have been satisfied is beliedby the existence of the proceedings before the DRT – The recordsshowed that the settlement of dues was only with respect to theunsecured creditors of KOFL, which was carried out pursuant tothe orders issued by the Company Judge – Therefore, given that thesecured creditors of KOFL have still not been satisfied and arebound to be affected by any order dismissing the winding upproceeding, the Company Court is directed to issue appropriatedirections to the Official Liquidator for publishing the advertisementof the proceedings in accordance with law.

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ACompanies Act, 1956: ss.293, 531 – Whether the agreementto sell executed by KOFL in favour of petitioner amounted tofraudulent preference and consequently whether the petitioner hasa right to seek the execution of sale deed in its favour – Held: s.531is a provision that deals with the effect of winding up of a companyon its antecedent transactions – It provides that a transfer or anyBother act done in relation to the property of a company within aperiod of six months before the commencement of its winding up(“twilight period”) shall be deemed to be a fraudulent preferenceof its creditors and accordingly be invalid – In the instant case,s.531 should be read in conjunction with s.293, which stipulates

Conclusion

Cthat the sale of the whole, or substantially the whole of the propertyof a public company requires the consent of its general meeting –s.531 provides that any act relating to the property of a companymay qualify as a fraudulent preference if two conditions are met –First, the dominant motive in the mind of the company (as representedby its directors or general body of shareholders) should be to preferDa particular creditor – Second, the said act must be undertakenduring the period of six months preceding the filing of the windingup petition of the company – While the first requirement ensuresthat the dominant intention to defraud creditors is detected, thesecond ensures that there is a level of commercial certainty andEfinality of transactions for those interacting with the company –s.293(1) requires the consent of the general meeting of a companyin case of a sale or disposition of the whole or substantial whole ofits property – s.293(1) is applicable to the instant case in view ofthe categorical finding by both the Courts below that the subjectproperty is the only immovable property of KOFL – Notably, noFapproval from the general meeting of KOFL was obtained – Therewas only a Board resolution permitting Respondent No.1 to executeagreements of sale and other documents for the purpose of sellingthe subject property – In the absence of the requisite approval fromthe general meeting, the instant application for execution of a saledeed cannot be allowed as doing so would be allowing the PetitionerGto sidestep the mandatory requirements of s.293(1) – A bare readingof s.531 shows that in addition to any transfer of property, it covers“any other act relating to the property” – These terms indicate thats.531 is comprehensive and includes indirect transactions within itsscope – The Petitioner is not precluded from benefiting from s.531Hon account of non-fulfilment of the six-month condition – Therefore, IDBI BANK LTD. THR. DGM(LEGAL) v. OFFICIAL LIQUIDATOR, OFFICE OFTHE OFFICIAL LIQUIDATOR OF COMPANIES

the agreement to sell cannot be termed as a fraudulent preferenceunder s.531.

Transfer of property: It is well-settled that the sale of animmovable property can only be effectuated through a sale deedand an agreement to sell does not transfer any right, title or interestin the immovable property.

Dismissing the Special Leave Petitions, the Court HELD: 1. From a reading of Rules 96, 99, and 24, it isclear that the advertisement of a winding up petition is mandatory.In the event that the petitioning creditor fails to advertise thepetition within the prescribed time, Rule 101 accords the Courtwith the discretion to substitute such petitioning creditor withanother creditor or contributory, if the latter is capable anddesirous of prosecuting the winding up petition. The winding upproceedings are proceedings in rem and have an impact on therights of people, in general. In a situation where the petitioningcreditor fails to advertise the petition and no other creditor orcontributory comes forward to prosecute it, Rule 101 should notbe read in a manner that absolutely bars the continuation of awinding up petition. This is particularly so when there areunsatisfied creditors who should have been given an opportunityto prosecute the petition, but were deprived of the same due tothe failure to advertise. Indeed, Rule 101 is only limited toinstances where the petitioning creditor fails to advertise thepetition. However, there is nothing in the language of Rules 24,96, or 99 to indicate that only such petitioning creditor canadvertise the petition. Given the absence of a specific provisionmandating that the petition only be advertised by petitioningcreditor, Company Court has the discretion to direct thepublishing of an advertisement to secure the interest of othercreditors. In such situations, the winding up proceedings cannotbe dismissed, as it would frustrate the very objective of securingthe interest of all creditors. [Para 8, 11.3] [561-B; 562-G-H; 563-A-C]

2. Due to the lack of adequate advertisement of the windingup petitions, it appears that the secured creditors of KOFL wereconstrained to approach the DRT for recovery of their dues byfiling O.A. Further, upon learning of the decision of the CompanyJudge dismissing the winding up petition, one of the secured A

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Acreditors (SBI) also approached the DRT to secure its interest.Based on this, the DRT had directed that the amount to bereturned to KOFL be attached so that the banks have anopportunity to recover their dues from KOFL. This clearly goeson to show that the secured creditors of KOFL were relevantstakeholders who were affected by the non-advertising of theBwinding up petition. They should have been called upon toindicate whether they would want to step into the shoes of thepetitioning creditors as per Rule 101. The records show that thesettlement of dues has only been with respect to the unsecuredcreditors of KOFL, which was carried out pursuant to the ordersCissued by the Company Judge. This is supported by the fact thatthe advertisement dated 24.08.2005 issued by KOFL invitingclaims from recoveries made by its Administrator, was only limitedto the depositors or unsecured creditors of the company.Therefore, given that the secured creditors of KOFL have stillnot been satisfied and are bound to be affected by any orderDdismissing the winding up proceeding, the decision of the DivisionBench reviving C.P. No. 179 of 2001 is upheld and the CompanyCourt is directed to issue appropriate directions to the OfficialLiquidator for publishing the advertisement of the proceedingsin accordance with law. The other winding up petition, C.P. No.180 of 2001 filed by the wife of Respondent No. 3 continues toEremain 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. Theimpugned judgment and decree does not contain any directionqua C.P. No. 180 of 2001, which shall therefore remain unaffected.[Paras 11.4-11.7] [563-D-H; 564-A-C]

F3. Section 531 is a provision that deals with the effect ofwinding up of a company on its antecedent transactions. It providesthat a transfer or any other act done in relation to the property ofa company within a period of six months before thecommencement of its winding up (“twilight period”) shall beGdeemed to be a fraudulent preference of its creditors andaccordingly be invalid. For the purpose of the present case,Section 531 should be read in conjunction with Section 293, whichstipulates that the sale of the whole, or substantially the whole ofthe property of a public company requires the consent of itsgeneral meeting. It is also well-settled that the sale of anHimmovable property can only be effectuated through a sale deed and an agreement to sell does not transfer any right, title orinterest in the immovable property. Section 293(1) is applicableto the present case in view of the categorical finding by both theCourts below that the subject property is the only immovableproperty of KOFL. Notably, no approval from the general meetingof KOFL has been obtained. There is only a Board resolutiondated 31.03.1999 permitting Respondent No. 1 to executeagreements of sale and other documents for the purpose of sellingthe subject property. In the absence of the requisite approvalfrom the general meeting, the instant application for execution ofa sale deed cannot be allowed as doing so would be allowing thePetitioner to sidestep the mandatory requirements of Section293(1). Therefore, C.A. No. 1208 of 2002 deserves to bedismissed on this ground alone. [Para 14, 17.1] [565-B-C; 566-F-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 fraudulentpreference under Section 531. Under Indian company law, Section531 of the 1956 Act (now Section 328 of the Companies Act, 2013)is the cornerstone provision that lays down the requirements fora transaction to amount to a fraudulent preference. Framed alongthe lines of Section 320 of the English Companies Act of 1948, itprovides that any act relating to the property of a company mayqualify as a fraudulent preference if two conditions are met. First,the dominant motive in the mind of the company (as representedby its directors or general body of shareholders) should be toprefer a particular creditor. Second, the said act must beundertaken during the period of six months preceding the filingof the winding up petition of the company. While the firstrequirement ensures that the dominant intention to defraudcreditors is detected, the second ensures that there is a level ofcommercial certainty and finality of transactions for thoseinteracting 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. KanhiyaLal & Ors., (1972) 42 Com Cas 196 (Del) – approved A

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A5. The Division Bench has entirely ignored the secondrequirement under Section 531. Solely based on an examinationof factors indicating a dominant motive of the management ofKOFL to benefit the Petitioner, it went on to hold that theagreement to sell constitutes a fraudulent preference. In doingso, it has failed to appreciate that the said agreement was executedBon 17.02.2000, while the winding up petitions were filed on02.07.2001, signifying that there was a gap of over sixteen monthsbetween the two events, as opposed to the six-month periodcontemplated under Section 531. Similarly, it failed to considerthat even the transfer of possession of the subject propertyCoccurred on 06.11.2000, which was also before the six-monthperiod preceding the filing of the winding up petition. Clearlythen, the Division Bench has erred in ignoring the time limitstipulated under Section 531 and holding that the transactionqualifies as a fraudulent preference. The same cannot bedisregarded as it is crucial for ensuring commercial certainty forDparties transacting with a company. Section 531 is comprehensiveand includes indirect transactions within its scope. Thus, thePetitioner is not precluded from benefiting from Section 531 onaccount of non-fulfilment of the six-month condition. Therefore,the agreement to sell dated 17.02.2000 cannot be termed as aEfraudulent preference under Section 531. [Paras 17.3-17.5] [567-F-H; 568-A-D]

Manik Ratan Guin & Ors. v. Prokash ChandraChattopadhyay, (1953-54) 58 CWN 545 (Cal); NationalConduits (P) Ltd. v. S.S. Arora, AIR 1968 SC 279 :F[1968] SCR 430; Lt. Col. RK Saxena v. Imperial ForestryCorporation, 2001 CLC 1746 –relied on From the Judgment and Order dated 17.08.2009 of the High Courtof Judicature at Madras in O.S.A. No. 284 of 2003.H

With

S.L.P. (Civil) No. 5143 of 2018.

R. P. Bhat, Sr. Adv., Ms. Madhu S., Sumit Gupta, Ms. SubhashreeMohapatra, Siddharth Raj Agarwal, Ms. Astha Tyagi, Advs. for thePetitioner.

Sriram Parakkat, B. Ragunath, P. Arun Kumar, Vijay Kumar,K. K. Mani, Ms. T. Archana, Advs. for the Respondents.

The Judgment of the Court was delivered by MOHAN M. SHANTANAGOUDAR, J.

1. The instant SLPs have been preferred by IDBI Bank (erstwhileUnited Western Bank) (hereinafter “the Petitioner”) against thejudgments dated 17.08.2009 and 28.07.2017 passed by the High Courtof Judicature at Madras in O.S.A. No. 284 of 2003 and O.S.A. No. 396of 2013 respectively, which relate to Company Petition (C.P.) No. 179of 2001. Vide the impugned judgments, the High Court dismissed anapplication seeking the execution of a sale deed in favour of the Petitionerby one Kothari Orient Finance Limited (hereinafter “KOFL”) and alsorevived the winding up proceedings initiated against KOFL.

2. The factual background to the instant petitions is as follows:

2.1 On 20.03.1992, KOFL availed a working capital loan of Rs.55 lakhs from the erstwhile United Western Bank (now taken over bythe Petitioner). As on 31.03.1999, the amount owed was Rs.60.55 lakhs.KOFL defaulted on the same. Consequently, it proposed a one-timesettlement to the Petitioner for repayment of its dues. Towards this end,KOFL offered to sell its property – Office Space Nos. 102 and 103, 1[st]Floor, Prestige Point, admeasuring 2056.89 sq. ft. and situated at No. 33,Haddows Road, Nungambakkam, Chennai [hereinafter “the subjectproperty”].

2.2 Pursuant to the same, KOFL and the Petitioner executed anagreement to sell dated 17.02.2000 with respect to the subject propertyfor a consideration of Rs.1.05 crores. According to this agreement, thePetitioner paid Rs. 41 lakhs as advance and the balance of Rs. 64 lakhswas to be paid at the time of the completion of the sale transaction. Thiswas done in pursuance of the authority vested with Mr. Pradeep D.Kothari (Director of KOFL and Respondent No. 1 in SLP No. 5143/2018, hereinafter “Respondent No. 1”) by the resolution dated31.03.1999 passed by the Board of Directors of KOFL, giving him the A

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Aright to execute agreement(s) of sale for the said property to improvethe liquidity of the company.

2.3 It is important to note that on 18.04.2000, in accordance withthe provisions of the Income Tax Act, 1961, a ‘No Objection Certificate’was issued by the income tax authorities for the sale of the subjectBproperty for a consideration of Rs.1.05 crores. Later, vide letter dated06.11.2000, possession of the property was also handed over to thePetitioner by KOFL.

2.4 Issues surfaced when two company petitions were filed on02.07.2001, being C.P. No. 179 of 2001 and C.P. No. 180 of 2001 by oneMr. S. Ramaiah (Respondent No. 3 in S.L.P. (Civil) No. 33825/2009)Cand his wife respectively. Having deposited monies with KOFL, whichhad been defaulted upon, they preferred these company petitions underSection 433(e) and (f) and Section 434 of the Companies Act, 1956(hereinafter “the 1956 Act”) seeking the winding up of KOFL and therepayment of their dues (hereinafter “winding up petitions”). WhenDthese petitions came up before the learned Company Judge on 05.12.2001,it was observed that the liabilities of KOFL (including outstanding securedloans) were more than the assets. Consequently, the petitions wereadmitted and directions were issued for appointment of an Administratorand a Provisional Liquidator for KOFL. In addition to this, directionswere also issued for publishing the company petitions in an English andETamil daily, as well as in the Government Gazette.

2.5 In April 2002, the Petitioner filed Company Application (C.A.)No. 1208 of 2002 in the aforesaid winding up petition being C.P. No. 179of 2001, seeking a direction to the Administrator to execute a sale deedFin its favour for the subject property, as per Section 536(2) of the 1956Act.

2.6 Vide order dated 21.04.2003, the learned Company Judgedismissed this application on the ground that the agreement to sellamounted to a fraudulent preference in favour of the Petitioner, as itGignored other similarly placed creditors. The appeal preferred by thePetitioner was numbered as O.S.A. No. 284 of 2003. On 17.08.2009, itwas dismissed on the basis that the agreement to sell suffered fromlegal infirmities and was a fraudulent preference. This order passed bythe Division Bench has been impugned in the instant S.L.P. filed by thePetitioner before this Court.H

Interim Proceedings

2.7 In the interim, Mr. Pradeep D. Kothari (Respondent No. 1)filed C.A. Nos. 2482-2485 of 2007, seeking permission to pay amountsdue to the unsecured creditors of KOFL out of his own personal funds.By order dated 09.10.2007, the learned Company Judge disposed ofthese applications, directing Respondent No. 1 to deposit Rs. 4.69 croreswith the Administrator towards full and final settlement of the dues ofthe unsecured creditors of KOFL. It was also directed that remainingamount (if any) should be refunded back to him after payment to thedepositors.

2.8 On 23.06.2009, based on a perusal of the interim and finalreport filed by the Administrator, the learned Company Judge noted that6,464 out of the total 10,968 depositors (unsecured creditors) of KOFLhad been paid by the Administrator to the extent of 20% and 30% of thefunds had been brought in by the Director. For the remaining 4,504depositors, it was observed that the entire claims of about Rs. 5.87 croreshad been settled by Respondent No. 1 privately. Since part of the amountdue to them was covered by recoveries made from debtors of KOFL,an amount of Rs. 1.95 crores remained out of the Rs. 4.69 croresdeposited by Respondent No. 1. Consequently, this amount was directedto be refunded back to him. Vide this order, the learned Company Judgealso discharged the Administrator on the basis that his primary obligationof redemption of dues of unsecured creditors had been fulfilled.

2.9 Against this backdrop, the original Company Petitions cameup for hearing before the Company Court on 21.06.2010. Notice wasissued to the petitioning creditor, S. Ramaiah, who is arraigned asRespondent No. 3 herein.

2.10 On 03.03.2011, the Petitioner filed another companyapplication, C.A. No. 734 of 2011 in C.P. No. 179 of 2001 seeking thedischarge of the Official Liquidator, who was acting as the ProvisionalLiquidator of KOFL (Respondent No. 2 in the SLPs before us). Thisapplication was made on the ground that there were no other claims leftto be settled against the company, and therefore, the services of theOfficial Liquidator were no longer required. The application was opposedby Respondent No. 1 on the ground that it would prejudice other creditorsof the company and was a mala fide attempt by the Petitioner to grabthe subject property. Meanwhile, the Official Liquidator filed a report on A

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A16.01.2013 seeking permission to advertise and invite claims fromunsettled creditors of KOFL, if any.

2.11 By order dated 04.10.2013, the learned Company Judgeallowed the application and discharged the liquidator in view of the factthat unsecured creditors of KOFL had been settled. Further, given theBlack of adequate advertising of the winding up petition, and theunwillingness of any other creditor or contributory of KOFL to prosecutethe petition in terms of Rule 101 of the Companies (Court) Rules, 1959(hereinafter “1959 Rules”), the original winding up petition, C.P. No.179 of 2001, was dismissed. The Official Liquidator was directed toreturn investments worth Rs. 1.27 crores which were lying with him,Cback to KOFL after deducing administrative expenses incurred by him.

2.12 Soon after this order, one of the secured creditors of KOFL,State Bank of India (hereinafter “SBI”) approached the Debts RecoveryTribunal, Chennai (hereinafter “DRT”) for securing its interest andsought an injunction restraining the Official Liquidator from refundingDthe sum of Rs. 1.27 crores to KOFL. By order dated 13.12.2013, theDRT ordered that the said sum be attached once it is transferred toKOFL, so that the banks can recover their dues from the company.

2.13 In the interim, Respondent No. 1 filed an appeal against theorder of the Company Court dismissing the winding up petition. By orderdated 28.07.2017, a Division Bench of the High Court revived the windingEup proceedings on the basis that it would be unjust and inequitable towind up the company only for the reason that no other creditor orcontributory was willing to prosecute the winding up petition. Takingnote of the secured creditors of KOFL who had still not been satisfiedand had consequently approached the DRT, C.P. No. 179 of 2001 wasrevived and the Official Liquidator was directed to continue the windingFup proceedings under the supervision of the Company Judge. This orderof the Division Bench in O.S.A. No. 396 of 2013 has been impugned inthe aforementioned S.L.P. (Civil) No. 5143 of 2018 filed by the Petitionerbefore this Court.

3. In view of this factual background, two issues arise forGconsideration before this Court:

First, whether the winding up proceedings against KOFL shouldbe revived.

Second, in the event that the proceedings should be revived, cana sale deed be executed based on the agreement to sell dated 17.02.2000Hentered into by the Petitioner and KOFL.

4. Learned Senior Counsel for the Petitioner argued that thewinding up petition deserves to be dismissed, as all the creditors of KOFLhave now been satisfied in accordance with the orders of the CompanyJudge and there are no other proceedings pending against KOFL beforeany fora. Further, since no creditor had challenged the order of theCompany Court dismissing the winding up proceedings, it was submittedthat the proceedings do not merit revival at this stage. As regards theexecution of a sale deed, learned Senior Counsel refuted the finding thatthe agreement to sell amounts to a fraudulent preference. Relying onthe provisions of Section 531 of the 1956 Act, he argued that theagreement to sell cannot be deemed as a fraudulent preference as theagreement to sell was not executed within the six-month period precedingthe filing of the winding up petition. In addition to this, he also advertedto the lack of any fraudulent intention underlying the transaction anddrew support from the No Objection Certificate issued by the IncomeTax authorities to argue that the sale was not undervalued. Lastly, it wassubmitted that Section 293(1) of the 1956 Act is inapplicable to the presentcase, as the subject property does not form the whole or substantialwhole of the property owned by KOFL. Thus, he stated that the approvalof the Board of Directors vide resolution dated 31.03.1999 was sufficient,and no approval from the general meeting was required.

5. Per contra, learned Counsel for Respondent No. 2 (OfficialLiquidator) submitted that the winding up proceedings were correctlyrevived, as there are several secured creditors of KOFL that have stillnot been satisfied. He also argued that the subject property is the onlyproperty of KOFL and cannot be transferred without the approval of thegeneral meeting in terms of Section 293(1) of the 1956 Act. With respectto the agreement to sell, it was submitted that it is a fraudulent preferencein favour of the Petitioner. To substantiate this, he relied on the provisionsof the agreement which state that the remaining consideration of Rs.64lakhs would be paid only at the time of registration of the property. Inlight of this, he submitted that the adjustment of the said amount was notcontemplated in the agreement and by doing so, the clause itself hasbeen rendered redundant.

6. We have considered the arguments advanced by both sidesand perused the material on record. Since the issue of fraudulentpreference hinges on the survival of the winding up petition, we shallfirst proceed to examine whether the Division Bench was correct inreviving the winding up proceedings.

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ARevival of the winding up petition

7. From a bare perusal of the decision of the Division Bench, it isevident that the requirements governing the advertisement of windingup petitions under the 1959 Rules are crucial for the determination ofthis issue. It would therefore be useful to note the relevant rules, whichare reproduced hereunder:

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“R.96. Admission of petition and directions as toadvertisement - Upon the filing of the petition, it shall be postedbefore the Judge in Chambers for admission of the petition andfixing a date for the hearing thereof and for directions as to theadvertisements to be published and the persons, if any, upon whomcopies of the petition are to be served. The Judge may, if he thinksfit, direct notice to be given to the company before giving directionsas to the advertisement of the petition.

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R.99: Advertisement of petition - Subject to any directions ofthe Court, the petition shall be advertised within the time and inthe manner provided by rule 24 of these rules. The advertisementshall be in Form No. 48.

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R.24: Advertisement of petition -

(1) Where any petition is required to be advertised, it shall, unlessthe Judge otherwise orders, or these rules otherwise provide, beadvertised not less than fourteen days before the date fixed forhearing, in one issue of the Official Gazette of the State or theUnion Territory concerned, and in one issue each of a dailynewspaper in the English language and a daily newspaper in theregional language circulating in the State or the Union E

FTerritory concerned, as may be fixed by the Judge.

R.101: Substitution of creditor or contributory for originalpetitioner - Where a petitioner – … (2) fails to advertise his petition withinthe time prescribed by these rules or by order of Court or suchextended time as the Court may allow …

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(4) if appearing, does not apply for an order in terms of the prayerof his petition, or, where in the opinion of the Court there is othersufficient cause for an order being made under this rule, the Courtmay, upon such terms as it may think just, substitute as petitionerany creditor or contributory who, in the opinion of the Court, would H

have a right to present a petition, and who is desirous of prosecutingthe petition.”

8. The above rules find mention in the part relating to winding uppetitions under the 1959 Rules. They lay down the procedure for institutinga winding up action. From a reading of Rules 96, 99, and 24, it is clearthat the advertisement of a winding up petition is mandatory. In the eventthat the petitioning creditor fails to advertise the petition within theprescribed time, Rule 101 accords the Court with the discretion tosubstitute such petitioning creditor with another creditor or contributory,if the latter is capable and desirous of prosecuting the winding up petition.

9. In the instant case, while dealing with C.A. No. 734 of 2011 inC.P. No. 179 of 2001 seeking discharge of the Official Liquidator, thelearned Company Judge observed that the mandatory procedure foradvertising a winding petition, as stipulated under Rules 95, 96, 99, and24 of the 1959 Rules had not been complied with. While looking into theimplications of the failure to advertise, the learned Company Judgeadverted to Rule 101, which allows for substitution of the petitioningcreditor. However, since it was found that no other creditor had expressedthe desire to prosecute the original petition, C.P. No. 179 of 2001 wasdismissed. It was observed that such dismissal would not prejudice thecreditors as more than 10,000 unsecured creditors of KOFL had beensettled in the last 12 years after being given adequate notice, and eventhe secured creditors would not be prejudiced, as they would still be freeto pursue their claims before the DRT.

10. As noted supra, a Division Bench of the High Court set asidethe order of the Company Court in appeal. While it was observed thatthe winding up petitions had not been advertised by the petitioning creditorin accordance with the 1959 Rules, it was held that it would be unjustand inequitable to wind up the company only for this reason, as therewere several secured creditors (including SBI) who had still not beensatisfied and had consequently approached the DRT. It was observedthat before dismissing the winding up petition, all the secured creditorsto whom KOFL owed money, should have been called by the OfficialLiquidator to inquire whether they wanted to step into the shoes of theoriginal petitioner. Taking a broad interpretation of Rule 101, the DivisionBench held that the Rule cannot be read as an absolute bar on thecontinuation of winding up proceedings, where the petitioning creditorfails to advertise the petition. Adverting to the inherent powers vestedwith the Company Court under Rule 9 and given the absence of a specific

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Aprovision mandating that the advertisement shall only be published bythe petitioning creditor, the Division Bench observed that the CompanyCourt has the discretion to direct the provisional liquidator to publish theadvertisement, where the situation so demands. In view of this, C.P. No.179 of 2001 was revived and the Official Liquidator was directed tocontinue the winding up proceedings.B

11. Upon examining the relevant rules and the decisions renderedby the learned Company Judge and the Division Bench, we are inclinedto agree with the view taken by the latter.

11.1 By order dated 05.12.2001, the learned Company Judge hadCdirected the publication of C.P. No. 179 of 2001 in an English and Tamildaily as well as the Government Gazette. However, despite this order,no such advertisement was made. To this extent, we agree with theDivision Bench that there has been a violation of the advertisementrequirements under Rules 96, 99 and 24, which are mandatory in nature[see National Conduits (P) Ltd. v. S.S. Arora, AIR 1968 SC 279; Lt.DCol. RK Saxena v. Imperial Forestry Corporation, 2001 CLC 1746].

11.2 Given this failure to advertise, the option of substitutionprovided in Rule 101 becomes relevant. In this respect, both the Courtsbelow have found that no other creditor or contributory expressedwillingness to prosecute the original winding up petition. At the sameEtime, as noted by the Division Bench, there are other unsatisfied securedcreditors of KOFL who were not given the option to step into the shoesof the petitioning creditor in terms of Rule 101.

11.3 Against this backdrop, the crucial question that arises for ourconsideration is whether a winding up petition can be dismissed solelyFon the ground of lack of a prosecuting creditor under Rule 101, or whetherthe Company Court has the power to direct the publication of anadvertisement by the Liquidator of the company, especially in cases whereother unsatisfied creditors still remain. For answering this question, it isimportant to bear in mind that winding up proceedings are proceedingsin rem and have an impact on the rights of people, in general. Thus, it isGmandatory to advertise such proceedings, so as to ensure that they receivethe widest possible publicity and all relevant stakeholders have adequatenotice. This implies that in a situation where the petitioning creditor failsto advertise the petition and no other creditor or contributory comesforward to prosecute it, Rule 101 should not be read in a manner thatHabsolutely bars the continuation of a winding up petition. This is particularly so when there are unsatisfied creditors who should have been given anopportunity to prosecute the petition, but were deprived of the same dueto the failure to advertise. Indeed, Rule 101 is only limited to instanceswhere the petitioning creditor fails to advertise the petition. However,there is nothing in the language of Rules 24, 96, or 99 to indicate thatonly such petitioning creditor can advertise the petition. In ourconsidered opinion, given the absence of a specific provision mandatingthat the petition only be advertised by petitioning creditor, the CompanyCourt has the discretion to direct the publishing of an advertisement tosecure the interest of other creditors. In such situations, the winding upproceedings cannot be dismissed, as it would frustrate the very objectiveof securing the interest of all creditors.

11.4 In light of this discussion, we find that it would be unjust todismiss the winding up petition in the instant case solely on the groundthat there is no other person willing to substitute the original creditor interms of Rule 101. Here, due to the lack of adequate advertisement ofthe winding up petitions, it appears that the secured creditors of KOFLwere constrained to approach the DRT for recovery of their dues byfiling O.A. Nos. 139 of 2001, 978 of 2000; and 14 of 2002. Further, uponlearning of the decision of the Company Judge dated 04.10.2013dismissing the winding up petition, one of the secured creditors (SBI)also approached the DRT to secure its interest. Based on this, vide orderdated 13.12.2013, the DRT had directed that the amount to be returnedto KOFL be attached so that the banks have an opportunity to recovertheir dues from KOFL. This clearly goes on to show that the securedcreditors of KOFL were relevant stakeholders who were affected bythe non-advertising of the winding up petition. They should have beencalled upon to indicate whether they would want to step into the shoesof the petitioning creditors as per Rule 101.

11.5 Clearly, the submission of the learned Senior Counsel for thePetitioner that the winding up petition deserves to be dismissed as allcreditors of KOFL have been satisfied is belied by the existence of theproceedings before the DRT. The records show that the settlement ofdues has only been with respect to the unsecured creditors of KOFL,which was carried out pursuant to the orders issued by the CompanyJudge. This is supported by the fact that the advertisement dated24.08.2005 issued by KOFL inviting claims from recoveries made by itsAdministrator, was only limited to the depositors or unsecured creditorsof the company.

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11.6 Therefore, given that the secured creditors of KOFL havestill not been satisfied and are bound to be affected by any order dismissingthe winding up proceeding, we uphold the decision of the Division Benchreviving C.P. No. 179 of 2001, and direct the Company Court to issueappropriate directions to the Official Liquidator for publishing theadvertisement of the proceedings in accordance with law.

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11.7 We hasten to add here that the other winding up petition,C.P. No. 180 of 2001 filed by the wife of Respondent No. 3 continues toremain on record, as the impugned proceedings pertain to C.A. No. 734of 2011, which was filed in C.P. No. 179 of 2001 only. The impugnedjudgment and decree does not contain any direction qua C.P. No. 180 ofC2001, which shall therefore remain unaffected.

12. In light of the finding that the revival of the winding up petitionby the Division Bench was correct, we will now turn to examine whetherthe agreement to sell executed by KOFL in favour of the Petitioneramounts to a fraudulent preference, and consequently, whether theDPetitioner has a right to seek the execution of a sale deed in its favour.

Execution of sale deed

13. Before delving into the merits of this issue, it would be usefulto refer to the relevant provisions of the 1956 Act:

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“S.531: Fraudulent preference -

(1) Any transfer of property, movable or immovable, delivery ofgoods, payment, execution or other act relating to property made,taken or done by or against a company within six months beforethe commencement of its winding up which, had it been made,Ftaken or done by or against an individual within three months beforethe presentation of an insolvency petition on which he is adjudgedinsolvent, would be deemed in his insolvency a fraudulentpreference, shall in the event of the company being wound up, bedeemed a fraudulent preference of its creditors and be invalidaccordingly.

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S.293: Restrictions on powers of Board -

(1) The Board of directors of a public company, or of a privatecompany which is a subsidiary of a public company, shall not,except with the consent of such public company or subsidiary ingeneral meeting,- H

(a) sell, lease or otherwise dispose of the whole, or substantiallythe whole, of the undertaking of the company, or where thecompany owns more than one undertaking, of the whole, orsubstantially the whole, of any such undertaking”.

(emphasis supplied)

14. Section 531 is a provision that deals with the effect of windingup of a company on its antecedent transactions. It provides that a transferor any other act done in relation to the property of a company within aperiod of six months before the commencement of its winding up(hereinafter “twilight period”) shall be deemed to be a fraudulentpreference of its creditors and accordingly be invalid. For the purpose ofthe present case, Section 531 should be read in conjunction with Section293, which stipulates that the sale of the whole, or substantially the wholeof the property of a public company requires the consent of its generalmeeting.

15. Here, while dealing with Company Application (C.A.) No.1208 of 2002 filed by the Petitioner for execution of a sale deed, thelearned Company Judge dismissed the same on the ground that theagreement to sell dated 17.02.2000 was a collusive transaction betweenthe Petitioner and the management of KOFL. It was observed that KOFLwas in financial distress even at the time that the agreement to sell wasentered into, and owed over Rs.5 crores to its other secured creditors.Given the existence of such secured and other unsecured creditors, thetransfer of the subject property in favour of the Petitioner (which wasfound to be the prime property of the company) was held to be a fraudulentpreference. Further, it was observed that the Petitioner would not haveany priority over the general body of creditors merely because possessionof the property had been handed over to it. It was also held that thePetitioner could not claim to be a bona fide purchaser who was unawareof the financial crunch of KOFL, as it had access to the annual report ofKOFL for the year 1999-2000, which revealed the company’s poorfinancial condition.

16. As noted supra, the Division Bench affirmed the order of theCompany Court in appeal on the basis that it would be unjust to allow thesale transaction, especially since the property in question was the onlyand prime immovable asset of KOFL and was to meet the demands ofseveral secured and unsecured creditors. In light of this, it was held thatthe Board resolution dated 31.03.1999 was insufficient and a resolutionof the general meeting of KOFL approving the sale transaction was

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Anecessary, as required under Section 293(1). The Division Bench furtherheld that the Petitioner only had an agreement to sell in its favour, whichdid not accord it with any rights by itself. Moreover, since the agreementto sell provided that the possession of the property be delivered to thevendee only at the time of completion of the transaction (which wouldbe the time of registration of the sale deed), it was observed that theBtransfer of possession on 06.11.2000 reflected the intention of themanagement of KOFL to met out preferential treatment to the Petitioner.Lastly, it was held that the Petitioner could not claim exclusion fromSection 531 on the basis that the agreement to sell had been entered intobefore the six-month twilight period. This was done because the DivisionCBench read Section 531 as relating to “transfers” of property only, andaccordingly held the agreement to sell in question is different from a“transfer” which only occurs through a sale deed in terms of Section 54of the Transfer of Property Act, 1882. Thus, the Division Bench ruledthat the Petitioner could not benefit from Section 531, even though theagreement to sell had been executed almost sixteen months before theDwinding up petitions were filed.

17. Upon examining the relevant rules and the decisions renderedby the learned Company Judge and the Division Bench, we agree withthe conclusion of the Division Bench that C.A. No. 1208 of 2002 filedby the Petitioner for execution of a sale deed in its favour is liable to beEdismissed. This is primarily because the requirements of Section 293(1)of the 1956 Act have not been met.

17.1 As stated supra, Section 293(1) requires the consent of thegeneral meeting of a company in case of a sale or disposition of thewhole or substantial whole of its property. It is also well-settled that thesale of an immovable property can only be effectuated through a saleFdeed and an agreement to sell does not transfer any right, title or interestin the immovable property [see Suraj Lamp & Industries (P) Ltd. (2)v. State of Haryana, (2012) 1 SCC 656; Bank of India v. Abhay D.Narottam, (2005) 11 SCC 520]. Given that C.A. No. 1208 of 2002 seeksexecution of a sale deed in favour of the Petitioner based on a priorGagreement to sell, the approval of the general meeting of the company interms of Section 293(1) becomes relevant. Contrary to the submissionmade by the learned Senior Counsel for the Petitioner, this provision isapplicable to the present case in view of the categorical finding by boththe Courts below that the subject property is the only immovable propertyof KOFL. Notably, no approval from the general meeting of KOFL hasHbeen obtained. There is only a Board resolution dated 31.03.1999

IDBI BANK LTD. THR. DGM(LEGAL) v. OFFICIAL LIQUIDATOR, OFFICE OF THEOFFICIAL LIQUIDATOR OF COMPANIES [MOHAN M. SHANTANAGOUDAR, J.]

permitting Respondent No. 1 to execute agreements of sale and otherdocuments for the purpose of selling the subject property. In the absenceof the requisite approval from the general meeting, the instant applicationfor execution of a sale deed cannot be allowed as doing so would beallowing the Petitioner to sidestep the mandatory requirements of Section293(1). Therefore, in our considered opinion, C.A. No. 1208 of 2002deserves to be dismissed on this ground alone.

17.2 Be that as it may, in light of the contentions raised by boththe parties on whether the agreement to sell in question amounts to afraudulent preference, we consider it necessary to address the same.We differ with the Division Bench inasmuch as the said agreement cannotbe termed as a fraudulent preference under Section 531. Under Indiancompany law, Section 531 of the 1956 Act (now Section 328 of theCompanies Act, 2013) is the cornerstone provision that lays down therequirements for a transaction to amount to a fraudulent preference.Framed along the lines of Section 320 of the English Companies Act of1948, it provides that any act relating to the property of a company mayqualify as a fraudulent preference if two conditions are met. First, thedominant motive in the mind of the company (as represented by itsdirectors or general body of shareholders) should be to prefer a particularcreditor [see Jayanthi Bai v. Popular Bank Ltd., AIR 1966 Ker 296;Official Liquidator, Victor Chit Fund (P.) Ltd. v. Kanhiya Lal &Ors., (1972) 42 ComCas 196 (Del)]. Second, the said act must beundertaken during the period of six months preceding the filing of thewinding up petition of the company. While the first requirement ensuresthat the dominant intention to defraud creditors is detected, the secondensures that there is a level of commercial certainty and finality oftransactions for those interacting with the company.

17.3 In light of this, when we look to the facts of the instant case,it appears that the Division Bench has entirely ignored the secondrequirement under Section 531. Solely based on an examination of factorsindicating a dominant motive of the management of KOFL to benefit thePetitioner, it went on to hold that the agreement to sell constitutes afraudulent preference. In doing so, it has failed to appreciate that thesaid agreement was executed on 17.02.2000, while the winding uppetitions were filed on 02.07.2001, signifying that there was a gap ofover sixteen months between the two events, as opposed to the six-month period contemplated under Section 531. Similarly, it failed toconsider that even the transfer of possession of the subject propertyoccurred on 06.11.2000, which was also before the six-month period

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Apreceding the filing of the winding up petition. Clearly then, the DivisionBench has erred in ignoring the time limit stipulated under Section 531and holding that the transaction qualifies as a fraudulent preference. Asnoted supra, the same cannot be disregarded as it is crucial for ensuringcommercial certainty for parties transacting with a company.

B17.4 Further, we differ with the reasoning of the Division Benchthat the Petitioner cannot avail benefit of Section 531 as the agreementto sell does not amount to a “transfer”. A bare reading of the provisionshows that in addition to any transfer of property, it covers “any otheract relating to the property”. These terms indicate that Section 531 iscomprehensive and includes indirect transactions within its scope [seeCManik Ratan Guin & Ors. v. Prokash Chandra Chattopadhyay,(1953-54) 58 CWN 545 (Cal)]. Thus, the Petitioner is not precludedfrom benefiting from Section 531 on account of non-fulfilment of thesix-month condition.

17.5 Therefore, it is evident that the agreement to sell datedD17.02.2000 cannot be termed as a fraudulent preference under Section531.

18. At this juncture, we would re-emphasize that our finding onfraudulent preference does not affect our conclusion that C.A. No. 1208of 2002 is liable to be dismissed, as the non-compliance with Section293(1) cannot be ignored. However, given our decision in support ofErevival of the winding up proceedings, we observe that even if theinfirmity with respect to Section 293 is subsequently removed by KOFL,any execution of a sale deed in favour of the Petitioner in the future willbe subject to the outcome of the winding up proceedings.

19. In view of the foregoing discussion, we uphold the decision ofFthe Division Bench of the High Court of Judicature at Madras dated28.07.2017 in O.S.A. No. 396 of 2013, reviving the winding up proceedingsin C.P. No. 179 of 2001. SLP (Civil) No. 5143 of 2018 preferred beforethis Court is dismissed accordingly.

As regards the impugned judgment of the Division Bench datedG17.08.2009 in O.S.A. No. 284 of 2003, we uphold the dismissal of C.A.No. 1208 of 2002 seeking the execution of a sale deed in favour of thePetitioner. SLP (Civil) No. 33825 of 2009 preferred before this Court isdismissed accordingly.

HDevika Gujral