2000 (3) TMI 927 - HC - Companies Law

Court upholds validity of asset transfer order under Companies Act 1956, finding no mala fide intent.

Bank of Tokyo - Mitsubishi Ltd. Versus Essar Steel Ltd.

Bank of Tokyo - Mitsubishi Ltd. Versus Essar Steel Ltd. - [2000] 27 SCL 411 (GUJ) Issues Involved:1. Validity of the order permitting the respondent to transfer assets under section 536(2) of the Companies Act, 1956.2. Allegation of mala fide intent behind the transfer of assets.3. Impact on the rights of the appellant bank as a creditor.4. Adequacy of the price and method of transfer.5. Interim relief and status quo order by the Debts Recovery Tribunal.Detailed Analysis:1. Validity of the order permitting the respondent to transfer assets under section 536(2) of the Companies Act, 1956:The appellant bank challenged the order dated 2-3-2000 by the learned Company Judge allowing the respondent to transfer its Pellet Division assets to Higrade Pellets Ltd. under section 536(2) of the Companies Act, 1956. The respondent sought this permission to restructure its financial position amidst financial difficulties. The court noted that the decision to transfer the Pellet Division was made long before the winding-up petition was filed, thus indicating no intent to defraud creditors.2. Allegation of mala fide intent behind the transfer of assets:The appellant argued that the transaction was not bona fide, citing that book entries were made on 31-3-1999 after receiving a statutory notice from the appellant. However, the court found clear evidence that the decision to transfer the Pellet Division was made at the Twentieth Annual General Meeting on 24-9-1996, well before the appellant invoked the guarantee. Therefore, the court concluded that the transfer decision was not made with a view to defraud the appellant or defeat its claim.3. Impact on the rights of the appellant bank as a creditor:The appellant contended that the transfer destroyed the rights of unsecured creditors to recover amounts by realizing the assets. However, the court observed that the respondent's financial condition and the intention behind the transfer-to raise funds for effective and efficient working-were taken into account by the learned Company Judge. The court emphasized that the judicial discretion under section 536(2) ensures that transactions beneficial to the company are not unduly hampered, provided they are not intended to defraud creditors.4. Adequacy of the price and method of transfer:The appellant argued that the transfer was not made by inviting public offers, which would have reflected the true worth of the assets, and no valuation data was provided. The court referred to the Supreme Court's decision in Navalkha & Sons v. Ramanya Das, noting that the context of public auction sales under rule 273 of the Companies (Court) Rules, 1959, did not apply to the current case under section 536(2). The court found that the decision to transfer the assets was made in good faith and was necessary for restructuring the respondent's business.5. Interim relief and status quo order by the Debts Recovery Tribunal:The appellant had filed an application under section 19 of the Recovery of Debts due to Banks & Financial Institutions Act, 1993, before the Debts Recovery Tribunal, seeking a decree against the principal debtor and the respondent for the amount due. The Tribunal had issued an interim order for maintaining the status quo regarding the respondent's immovable properties described in Exhibit-N. The court noted that the question of interim relief was still pending before the Tribunal, and the appellant had pursued the statutory remedy available under the law.Conclusion:The court concluded that the learned Company Judge was correct in granting permission under section 536(2) for the proposed transfer, as it was not intended to defraud creditors and was necessary for the respondent's financial restructuring. The appeal was summarily dismissed, and the request for a stay order was rejected.