2005 (9) TMI 318 - HC - Companies Law

Court denies specific performance, allows recovery of advance payments with interest. Liberty granted for future claims.

VR. Muzumdar Versus Mysore Kirloskar Ltd. (In Liquidation)

VR. Muzumdar Versus Mysore Kirloskar Ltd. (In Liquidation) - [2006] 66 SCL 170 (KAR.) Issues Involved:1. Entitlement to reliefs sought under Section 446 of the Companies Act, 1956.2. Validity of agreements of sale during the pendency of winding-up petitions.3. Bona fide nature of transactions and commercial compulsion.4. Approval requirements for sale of company assets.5. Validity of acts of Directors under Section 290 of the Companies Act.Detailed Analysis:1. Entitlement to Reliefs Sought Under Section 446 of the Companies Act, 1956:The applicants sought to call for proceedings in suits pending before the Civil Judge and to direct the Official Liquidator to execute and register sale deeds in their favor. Alternatively, they requested permission to pursue the suits and stay the tender notification. The court examined whether the applicants were entitled to these reliefs.2. Validity of Agreements of Sale During the Pendency of Winding-Up Petitions:The agreements of sale were executed between August and October 2000, during the pendency of winding-up petitions filed in March 2000. The court considered whether these agreements were void under Section 536(2) of the Companies Act. The court noted that the Board of Directors, aware of the company's financial instability, resolved to sell non-performing assets to stabilize finances. However, the agreements were executed without the required approvals from financial institutions and the government, rendering them invalid.3. Bona Fide Nature of Transactions and Commercial Compulsion:The court examined whether the sales were made bona fide under commercial compulsion. It was determined that the sales were not made to save or protect the company's property or to enable it to run its business, but rather appeared to have a sinister and oblique motive. The court referenced the Supreme Court's decisions in Chittoor District Co-operative Marketing Society Ltd. v. Vegetols Ltd. and Pankaj Mehra v. State of Maharashtra, which emphasized that transactions during the pendency of winding-up petitions must be bona fide and necessary for the company's operations.4. Approval Requirements for Sale of Company Assets:The Board resolution required approvals from the Board of Directors, financial institutions, and the Government of Karnataka for the sale of the company's properties. The applicants failed to provide evidence of these approvals, further invalidating the agreements of sale. The court emphasized that the sale of assets without these approvals, especially during the pendency of winding-up petitions, could not be considered valid.5. Validity of Acts of Directors Under Section 290 of the Companies Act:The applicants argued that the acts of the Directors were valid under Section 290, which deals with the validity of acts of Directors despite any subsequent discovery of defects or disqualifications in their appointments. The court rejected this argument, stating that Section 290 applies to cases where the appointment of Directors is later found invalid, not to the execution of agreements without required approvals.Conclusion:The court concluded that the applicants did not establish an unimpeachable claim for specific performance of the agreements. However, the applicants were permitted to prosecute their suits for the recovery of advance amounts paid under the agreements, with interest. Applications C.A. Nos. 481 and 482 of 2005 were rejected, with the applicants given the liberty to lodge their claims when the Official Liquidator invites claims.