Prior clearance for revival finance in stayed winding-up proceedings may be valid where transactions are bona fide and business-critical.

A company under a stayed winding-up regime may still seek prior judicial clearance under section 536(2) for rehabilitative finance, because such an application is not a proceeding to enforce pre-existing rights or liabilities. Financial borrowings, advances, credit limits and related facilities can be treated as bona fide and in the normal course of business where they form part of a genuine revival package aimed at restarting operations, preserving employment and keeping the company as a going concern. Objections based on alleged camouflage, procedural defects, promoter contribution, guarantees, land sale or similar formalities were treated as unpersuasive in light of the rehabilitation purpose.

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Issues: (i) whether an application under section 536(2) of the Companies Act, 1956 was maintainable and entertainable despite the notification declaring the undertaking a relief undertaking and staying the winding-up proceedings; (ii) whether the proposed borrowings, advances, credit limits and financial facilities for revival and running of the mill deserved authorisation as bona fide transactions in the normal course of business.

Issue (i): whether an application under section 536(2) of the Companies Act, 1956 was maintainable and entertainable despite the notification declaring the undertaking a relief undertaking and staying the winding-up proceedings.

Analysis: The notification under section 4(1)(a)(iv) of the Bombay Relief Undertakings (Special Provisions) Act, 1958 stayed proceedings for enforcement of pre-existing rights and liabilities, but the present proceeding was not one for enforcement against the company. It was an application by the company itself seeking prior judicial clearance for financial arrangements intended to support revival of the business. Such an application did not conflict with the stay of the winding-up petition and could be examined on merits.

Conclusion: The application was maintainable and could be entertained notwithstanding the relief undertaking notification.

Issue (ii): whether the proposed borrowings, advances, credit limits and financial facilities for revival and running of the mill deserved authorisation as bona fide transactions in the normal course of business.

Analysis: The financial assistance was part of a rehabilitation package arranged with financial institutions and the State, aimed at restarting operations, protecting employment, and preserving the company as a going concern. The objections regarding camouflage, procedural non-compliance, promoter contribution, guarantees, land sale and related formalities were rejected or treated as not surviving. The proposed utilisation was for running the mills and keeping the business going, and not for settling past dues of other creditors.

Conclusion: The proposed transactions were authorised and declared to be bona fide, valid and binding, and the application under section 536(2) was allowed.

Final Conclusion: Clearance was granted for the rehabilitation finance package so that the company could continue operations as a going concern, and the proposed transactions were protected against challenge in the event of a winding-up order.

Ratio Decidendi: A company in a stayed winding-up situation may seek and obtain prior clearance under section 536(2) for genuinely rehabilitative finance, because such a request is not a proceeding enforcing pre-existing rights or liabilities and may be approved where the transactions are bona fide and in the normal course of business.

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