caselaws

Supreme Court of India
Idbi Bank Limited Through Dgm … vs The Official Liquidator, Office … on 17 October, 2019Author: Mohan M. Shantanagoudar

Bench: Mohan M. Shantanagoudar, Ajay Rastogi

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

SPECIAL LEAVE PETITION (CIVIL) NO. 33825 OF 2009

IDBI Bank Limited Through DGM (Legal) …..Petitioner

Versus
The Official Liquidator, Office of the
Official Liquidator of Companies & Anr. …..Respondents

WITH

SPECIAL LEAVE PETITION (CIVIL) NO. 5143 OF 2018

IDBI Bank Limited …..Petitioner

Versus

Pradeep D. Kothari & Ors. …..Respondents

JUDGMENT

MOHAN M. SHANTANAGOUDAR, J.

1. The instant SLPs have been preferred by IDBI Bank

(erstwhile United Western Bank) ( hereinafter “the Petitioner”)

against the judgments dated 17.08.2009 and 28.07.2017
Signature Not Verified

passed by the High Court of Judicature at Madras in O.S.A. No.
Digitally signed by
GULSHAN KUMAR
ARORA
Date: 2019.10.18
10:20:18 IST
Reason:

284 of 2003 and O.S.A. No. 396 of 2013 respectively, which

1
relate to Company Petition (C.P.) No. 179 of 2001. Vide the

impugned judgments, the High Court dismissed an application

seeking the execution of a sale deed in favour of the Petitioner

by one Kothari Orient Finance Limited ( hereinafter “KOFL”) and

also revived 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 by the Petitioner). As on 31.03.1999, the amount owed

was Rs.60.55 lakhs. KOFL defaulted on the same.

Consequently, it proposed a one-time settlement 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 subject property”].

2.2 Pursuant to the same, KOFL and the Petitioner executed

an agreement to sell dated 17.02.2000 with respect to the

subject property for a consideration of Rs.1.05 crores.

According to this agreement, the Petitioner paid Rs. 41 lakhs as

advance and the balance of Rs. 64 lakhs was to be paid at the

2
time of the completion of the sale transaction. This was 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 dated

31.03.1999 passed by the Board of Directors of KOFL, giving

him the right to execute agreement(s) of sale for the said

property to improve the liquidity of the company.

2.3 It is important to note that on 18.04.2000, in accordance

with the provisions of the Income Tax Act, 1961, a ‘No

Objection Certificate’ was issued by the income tax authorities

for the sale of the subject property for a consideration of

Rs.1.05 crores. Later, vide letter dated 06.11.2000, possession

of the property was also handed over to the Petitioner by KOFL.

2.4 Issues surfaced when two company petitions were filed on

02.07.2001, being C.P. No. 179 of 2001 and C.P. No. 180 of

2001 by one Mr. S. Ramaiah (Respondent No. 3 in S.L.P. (Civil)

No. 33825/2009) and his wife respectively. Having deposited

monies with KOFL, which had been defaulted upon, they

preferred these company petitions under Section 433(e) and (f)

and Section 434 of the Companies Act, 1956 ( hereinafter “the

1956 Act”) seeking the winding up of KOFL and the repayment

of their dues (hereinafter “winding up petitions”). When these

3
petitions came up before the learned Company Judge on

05.12.2001, it was observed that the liabilities of KOFL

(including outstanding secured loans) were more than the

assets. Consequently, the petitions were admitted and

directions were issued for appointment of an Administrator and

a Provisional Liquidator for KOFL. In addition to this, directions

were also issued for publishing the company petitions in an

English and Tamil daily, as well as in the Government Gazette.

Genesis of S.L.P. (Civil) No. 33825 of 2009

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. 179 of 2001, seeking a direction to the

Administrator to execute a sale deed in its favour for the

subject property, as per Section 536(2) of the 1956 Act.

2.6 Vide order dated 21.04.2003, the learned Company Judge

dismissed this application on the ground that the agreement to

sell amounted to a fraudulent preference in favour of the

Petitioner, as it ignored other similarly placed creditors. The

appeal preferred by the Petitioner was numbered as O.S.A. No.

284 of 2003. On 17.08.2009, it was dismissed on the basis that

the agreement to sell suffered from legal infirmities and was a

fraudulent preference. This order passed by the Division Bench

4
has been impugned in the instant S.L.P. filed by the Petitioner

before this Court.

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

amounts due to the unsecured creditors of KOFL out of his own

personal funds. By order dated 09.10.2007, the learned

Company Judge disposed of these applications, directing

Respondent No. 1 to deposit Rs. 4.69 crores with the

Administrator towards full and final settlement of the dues of

the unsecured creditors of KOFL. It was also directed that

remaining amount (if any) should be refunded back to him after

payment to the depositors.

2.8 On 23.06.2009, based on a perusal of the interim and final

report filed by the Administrator, the learned Company Judge

noted that 6,464 out of the total 10,968 depositors (unsecured

creditors) of KOFL had been paid by the Administrator to the

extent of 20% and 30% of the funds had been brought in by the

Director. For the remaining 4,504 depositors, it was observed

that the entire claims of about Rs. 5.87 crores had been settled

by Respondent No. 1 privately. Since part of the amount due to

them was covered by recoveries made from debtors of KOFL,

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an amount of Rs. 1.95 crores remained out of the Rs. 4.69

crores deposited by Respondent No. 1. Consequently, this

amount was directed to be refunded back to him. Vide this

order, the learned Company Judge also discharged the

Administrator on the basis that his primary obligation of

redemption of dues of unsecured creditors had been fulfilled.

2.9 Against this backdrop, the original Company Petitions

came up for hearing before the Company Court on 21.06.2010.

Notice was issued to the petitioning creditor, S. Ramaiah, who

is arraigned as Respondent No. 3 herein.

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

2.10 On 03.03.2011, the Petitioner filed another company

application, C.A. No. 734 of 2011 in C.P. No. 179 of 2001

seeking the discharge of the Official Liquidator, who was acting

as the Provisional Liquidator of KOFL (Respondent No. 2 in the

SLPs before us). This application was made on the ground that

there were no other claims left to be settled against the

company, and therefore, the services of the Official Liquidator

were no longer required. The application was opposed by

Respondent No. 1 on the ground that it would prejudice other

creditors of the company and was a mala fide attempt by the

Petitioner to grab the subject property. Meanwhile, the Official

6
Liquidator filed a report on 16.01.2013 seeking permission to

advertise and invite claims from unsettled creditors of KOFL, if

any.

2.11 By order dated 04.10.2013, the learned Company Judge

allowed the application and discharged the liquidator in view of

the fact that unsecured creditors of KOFL had been settled.

Further, given the lack of adequate advertising of the winding

up petition, and the unwillingness of any other creditor or

contributory of KOFL to prosecute the 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 to return

investments worth Rs. 1.27 crores which were lying with him,

back 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 Recovery Tribunal, Chennai (hereinafter “DRT”) for

securing its interest and sought an injunction restraining the

Official Liquidator from refunding the sum of Rs. 1.27 crores to

KOFL. By order dated 13.12.2013, the DRT ordered that the

7
said sum be attached once it is transferred to KOFL, so that the

banks can recover their dues from the company.

2.13 In the interim, Respondent No. 1 filed an appeal against

the order of the Company Court dismissing the winding up

petition. By order dated 28.07.2017, a Division Bench of the

High Court revived the winding up proceedings on the basis

that it would be unjust and inequitable to wind up the company

only for the reason that no other creditor or contributory was

willing to prosecute the winding up petition. Taking note of the

secured creditors of KOFL who had still not been satisfied and

had consequently approached the DRT, C.P. No. 179 of 2001

was revived and the Official Liquidator was directed to continue

the winding up proceedings under the supervision of the

Company Judge. This order of the Division Bench in O.S.A. No.

396 of 2013 has been impugned in the aforementioned S.L.P.

(Civil) No. 5143 of 2018 filed by the Petitioner before this Court.

3. In view of this factual background, two issues arise for

consideration before this Court:

First, whether the winding up proceedings against KOFL

should be revived.

Second, in the event that the proceedings should be

revived, can a sale deed be executed based on the agreement

8
to sell dated 17.02.2000 entered into by the Petitioner and

KOFL.

4. Learned Senior Counsel for the Petitioner argued that the

winding up petition deserves to be dismissed, as all the

creditors of KOFL have now been satisfied in accordance with

the orders of the Company Judge and there are no other

proceedings pending against KOFL before any fora. Further,

since no creditor had challenged the order of the Company

Court dismissing the winding up proceedings, it was submitted

that the proceedings do not merit revival at this stage. As

regards the execution of a sale deed, learned Senior Counsel

refuted the finding that the agreement to sell amounts to a

fraudulent preference. Relying on the provisions of Section 531

of the 1956 Act, he argued that the agreement to sell cannot

be deemed as a fraudulent preference as the agreement to sell

was not executed within the six-month period preceding the

filing of the winding up petition. In addition to this, he also

adverted to the lack of any fraudulent intention underlying the

transaction and drew support from the No Objection Certificate

issued by the Income Tax authorities to argue that the sale was

not undervalued. Lastly, it was submitted that Section 293(1) of

the 1956 Act is inapplicable to the present case, as the subject

9
property does not form the whole or substantial whole of the

property owned by KOFL. Thus, he stated that the approval of

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 (Official

Liquidator) submitted that the winding up proceedings were

correctly revived, as there are several secured creditors of

KOFL that have still not been satisfied. He also argued that the

subject property is the only property of KOFL and cannot be

transferred without the approval of the general meeting in

terms of Section 293(1) of the 1956 Act. With respect to the

agreement to sell, it was submitted that it is a fraudulent

preference in favour of the Petitioner. To substantiate this, he

relied on the provisions of the agreement which state that the

remaining consideration of Rs.64 lakhs would be paid only at

the time of registration of the property. In light of this, he

submitted that the adjustment of the said amount was not

contemplated in the agreement and by doing so, the clause

itself has been rendered redundant.

6. We have considered the arguments advanced by both

sides and perused the material on record. Since the issue of

10
fraudulent preference hinges on the survival of the winding up

petition, we shall first proceed to examine whether the Division

Bench was correct in reviving the winding up proceedings.

Revival of the winding up petition

7. From a bare perusal of the decision of the Division Bench,

it is evident that the requirements governing the advertisement

of winding up petitions under the 1959 Rules are crucial for the

determination of this issue. It would therefore be useful to note

the relevant rules, which are reproduced hereunder:

“R.96. Admission of petition and directions as
to advertisement – 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. The Judge may, if he thinks fit, direct notice
to be given to the company before giving directions
as to the advertisement of the petition.

R.99: Advertisement of petition – 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. The advertisement
shall be in Form No. 48.

R.24: Advertisement of petition –
(1) 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

11
newspaper in the regional language circulating in the
State or the Union
Territory concerned, as may be fixed by the Judge.

R.101: Substitution of creditor or contributory
for original petitioner –
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.”

8. The above rules find mention in the part relating to

winding up petitions under the 1959 Rules. They lay down the

procedure for instituting a winding up action. 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.

12
9. In the instant case, while dealing with C.A. No. 734 of

2011 in C.P. No. 179 of 2001 seeking discharge of the Official

Liquidator, the learned Company Judge observed that the

mandatory procedure for advertising a winding petition, as

stipulated under Rules 95, 96, 99, and 24 of the 1959 Rules had

not been complied with. While looking into the implications of

the failure to advertise, the learned Company Judge adverted to

Rule 101, which allows for substitution of the petitioning

creditor. However, since it was found that no other creditor had

expressed the desire to prosecute the original petition, C.P. No.

179 of 2001 was dismissed. It was observed that such dismissal

would not prejudice the creditors as more than 10,000

unsecured creditors of KOFL had been settled in the last 12

years after being given adequate notice, and even the secured

creditors would not be prejudiced, as they would still be free to

pursue their claims before the DRT.

10. As noted supra, a Division Bench of the High Court set

aside the order of the Company Court in appeal. While it was

observed that the winding up petitions had not been advertised

by the petitioning creditor in accordance with the 1959 Rules, it

was held that it would be unjust and inequitable to wind up the

company only for this reason, as there were several secured

13
creditors (including SBI) who had still not been satisfied and

had consequently approached the DRT. It was observed that

before dismissing the winding up petition, all the secured

creditors to whom KOFL owed money, should have been called

by the Official Liquidator to inquire whether they wanted to

step into the shoes of the original petitioner. Taking a broad

interpretation of Rule 101, the Division Bench held that the

Rule cannot be read as an absolute bar on the continuation of

winding up proceedings, where the petitioning creditor fails to

advertise the petition. Adverting to the inherent powers vested

with the Company Court under Rule 9 and given the absence of

a specific provision mandating that the advertisement shall

only be published by the petitioning creditor, the Division

Bench observed that the Company Court has the discretion to

direct the provisional liquidator to publish the advertisement,

where the situation so demands. In view of this, C.P. No. 179 of

2001 was revived and the Official Liquidator was directed to

continue the winding up proceedings.

11. Upon examining the relevant rules and the decisions

rendered by the learned Company Judge and the Division

Bench, we are inclined to agree with the view taken by the

latter.

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11.1 By order dated 05.12.2001, the learned Company Judge

had directed the publication of C.P. No. 179 of 2001 in an

English and Tamil daily as well as the Government Gazette.

However, despite this order, no such advertisement was made.

To this extent, we agree with the Division Bench that there has

been a violation of the advertisement requirements 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. Col. RK Saxena v. Imperial Forestry Corporation, 2001

CLC 1746].

11.2 Given this failure to advertise, the option of substitution

provided in Rule 101 becomes relevant. In this respect, both

the Courts below have found that no other creditor or

contributory expressed willingness to prosecute the original

winding up petition. At the same time, as noted by the Division

Bench, there are other unsatisfied secured creditors of KOFL

who were not given the option to step into the shoes of the

petitioning creditor in terms of Rule 101.

11.3 Against this backdrop, the crucial question that arises for

our consideration is whether a winding up petition can be

dismissed solely on the ground of lack of a prosecuting creditor

under Rule 101, or whether the Company Court has the power

15
to direct the publication of an advertisement by the Liquidator

of the company, especially in cases where other unsatisfied

creditors still remain. For answering this question, it is

important to bear in mind that winding up proceedings are

proceedings in rem and have an impact on the rights of people,

in general. Thus, it is mandatory to advertise such proceedings,

so as to ensure that they receive the widest possible publicity

and all relevant stakeholders have adequate notice. This

implies that 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. In our considered opinion, given the

absence of a specific provision mandating that the petition only

be advertised by petitioning creditor, the Company Court has

16
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.

11.4 In light of this discussion, we find that it would be unjust

to dismiss the winding up petition in the instant case solely on

the ground that there is no other person willing to substitute

the original creditor in terms of Rule 101. Here, 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. Nos.

139 of 2001, 978 of 2000; and 14 of 2002. Further, upon

learning of the decision of the Company Judge dated

04.10.2013 dismissing the winding up petition, one of the

secured creditors (SBI) also approached the DRT to secure its

interest. Based on this, vide order dated 13.12.2013, 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

17
have been called upon to indicate whether they would want to

step into the shoes of the petitioning creditors as per Rule 101.

11.5 Clearly, the submission of the learned Senior Counsel for

the Petitioner that the winding up petition deserves to be

dismissed as all creditors of KOFL have been satisfied is belied

by the existence of the proceedings before the DRT. 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.

11.6 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, we uphold the

decision of the Division Bench reviving C.P. No. 179 of 2001,

and direct the Company Court to issue appropriate directions to

the Official Liquidator for publishing the advertisement of the

proceedings in accordance with law.

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

18
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.

12. In light of the finding that the revival of the winding up

petition by the Division Bench was correct, we will now turn to

examine whether the agreement to sell executed by KOFL in

favour of the Petitioner amounts to a fraudulent preference,

and consequently, whether the Petitioner 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

useful to refer to the relevant provisions of the 1956 Act:

“S.531: Fraudulent preference –
(1) 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.

S.293: Restrictions on powers of Board –

19
(1) 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”.
(emphasis supplied)

14. 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 ( hereinafter “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.

15. Here, while dealing with Company Application (C.A.) No.

1208 of 2002 filed by the Petitioner for execution of a sale

deed, the learned Company Judge dismissed the same on the

ground that the agreement to sell dated 17.02.2000 was a

collusive transaction between the Petitioner and the

20
management of KOFL. It was observed that KOFL was in

financial distress even at the time that the agreement to sell

was entered into, and owed over Rs.5 crores to its other

secured creditors. Given the existence of such secured and

other unsecured creditors, the transfer of the subject property

in favour of the Petitioner (which was found to be the prime

property of the company) was held to be a fraudulent

preference. Further, it was observed that the Petitioner would

not have any priority over the general body of creditors merely

because possession of the property had been handed over to it.

It was also held that the Petitioner could not claim to be a bona

fide purchaser who was unaware of the financial crunch of

KOFL, as it had access to the annual report of KOFL for the year

1999-2000, which revealed the company’s poor financial

condition.

16. As noted supra, the Division Bench affirmed the order of

the Company Court in appeal on the basis that it would be

unjust to allow the sale transaction, especially since the

property in question was the only and prime immovable asset

of KOFL and was to meet the demands of several secured and

unsecured creditors. In light of this, it was held that the Board

resolution dated 31.03.1999 was insufficient and a resolution of

21
the general meeting of KOFL approving the sale transaction

was necessary, as required under Section 293(1). The Division

Bench further held that the Petitioner only had an agreement to

sell in its favour, which did not accord it with any rights by

itself. Moreover, since the agreement to sell provided that the

possession of the property be delivered to the vendee only at

the time of completion of the transaction (which would be the

time of registration of the sale deed), it was observed that the

transfer of possession on 06.11.2000 reflected the intention of

the management of KOFL to met out preferential treatment to

the Petitioner. Lastly, it was held that the Petitioner could not

claim exclusion from Section 531 on the basis that the

agreement to sell had been entered into before the six-month

twilight period. This was done because the Division Bench read

Section 531 as relating to “transfers” of property only, and

accordingly held the agreement to sell in question is different

from a “transfer” which only occurs through a sale deed in

terms of Section 54 of the Transfer of Property Act, 1882. Thus,

the Division Bench ruled that the Petitioner could not benefit

from Section 531, even though the agreement to sell had been

executed almost sixteen months before the winding up

petitions were filed.

22
17. Upon examining the relevant rules and the decisions

rendered by the learned Company Judge and the Division

Bench, we agree with the conclusion of the Division Bench that

C.A. No. 1208 of 2002 filed by the Petitioner for execution of a

sale deed in its favour is liable to be dismissed. 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

the general meeting of a company in case of a sale or

disposition of the whole or substantial whole of its property. 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 [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 seeks execution of a sale deed in favour of the

Petitioner based on a prior agreement to sell, the approval of

the general meeting of the company in terms of Section 293(1)

becomes relevant. Contrary to the submission made by the

learned Senior Counsel for the Petitioner, this provision is

applicable to the present case in view of the categorical finding

23
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, in our

considered opinion, C.A. No. 1208 of 2002 deserves to be

dismissed on this ground alone.

17.2 Be that as it may, in light of the contentions raised by

both the parties on whether the agreement to sell in question

amounts to a fraudulent preference, we consider it necessary

to address the same. We differ with the Division Bench

inasmuch as the said 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

24
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 [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 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.

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 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

25
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. As noted supra, the same cannot be disregarded as

it is crucial for ensuring commercial certainty for parties

transacting with a company.

17.4 Further, we differ with the reasoning of the Division

Bench that the Petitioner cannot avail benefit of Section 531 as

the agreement to sell does not amount to a “transfer”. A bare

reading of the provision shows that in addition to any transfer

of property, it covers “any other act relating to the property”.

These terms indicate that Section 531 is comprehensive and

includes indirect transactions within its scope [ see Manik

Ratan Guin & Ors. v. Prokash Chandra Chattopadhyay,

(1953-54) 58 CWN 545 (Cal)]. Thus, the Petitioner is not

26
precluded from benefiting from Section 531 on account of non-

fulfilment of the six-month condition.

17.5 Therefore, it is evident that the agreement to sell dated

17.02.2000 cannot be termed as a fraudulent preference under

Section 531.

18. At this juncture, we would re-emphasize that our finding

on fraudulent preference does not affect our conclusion that

C.A. No. 1208 of 2002 is liable to be dismissed, as the non-

compliance with Section 293(1) cannot be ignored. However,

given our decision in support of revival of the winding up

proceedings, we observe that even if the infirmity with respect

to Section 293 is subsequently removed by KOFL, any

execution of a sale deed in favour of the Petitioner in the future

will be subject to the outcome of the winding up proceedings.

19. In view of the foregoing discussion, we uphold the decision

of the Division Bench of the High Court of Judicature at Madras

dated 28.07.2017 in O.S.A. No. 396 of 2013, reviving the

winding up proceedings in C.P. No. 179 of 2001. SLP (Civil) No.

5143 of 2018 preferred before this Court is dismissed

accordingly.

As regards the impugned judgment of the Division Bench

dated 17.08.2009 in O.S.A. No. 284 of 2003, we uphold the

27
dismissal of C.A. No. 1208 of 2002 seeking the execution of a

sale deed in favour of the Petitioner. SLP (Civil) No. 33825 of

2009 preferred before this Court is dismissed accordingly.

……………………………………………J.
(MOHAN M. SHANTANAGOUDAR)

..…..….……………………………..….J.
(AJAY RASTOGI)
NEW DELHI;
OCTOBER 17, 2019

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