Limitation and bona fides govern transfer validation, while mandatory recovery-sale payment rules control auction validity.

An application to validate a transfer made during winding up under section 536(2) of the Companies Act, 1956 was governed, where no special period was prescribed, by the residuary limitation period under Article 137 of the Limitation Act, 1963; filed nearly ten years after the cause arose, it was time-barred. The transferee was also not shown to be bona fide, as the surrounding circumstances suggested an attempt to overreach the injunction against alienation, so validation was refused. The mortgage in favour of the bank was upheld because the alleged non-deposit of original title deeds and description discrepancies were not proved to invalidate the charge. A recovery auction was liable to be set aside because the bid amount was not paid within the mandatory statutory schedule.

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Issues: (i) Whether an application under section 536(2) of the Companies Act, 1956 seeking validation of a transfer made during winding up is barred by limitation; (ii) whether the transferee was a bona fide purchaser entitled to ratification of the transaction; (iii) whether the mortgage in favour of the bank was invalid for want of deposit of original title deeds or for alleged discrepancies in the property description; and (iv) whether the auction sale was liable to be set aside for failure to pay the bid amount within the stipulated time.

Issue (i): Whether an application under section 536(2) of the Companies Act, 1956 seeking validation of a transfer made during winding up is barred by limitation?

Analysis: Section 536(2) does not prescribe any special period of limitation or any separate procedure for seeking validation. In the absence of an express limitation period in the Companies Act for such an application, the residuary Article 137 of the Limitation Act, 1963 applies. The right to apply arose, at the latest, when the official liquidator put the applicant on notice and demanded delivery of the property. The application was instituted nearly ten years later, well beyond the three-year period.

Conclusion: The application was barred by limitation.

Issue (ii): Whether the transferee was a bona fide purchaser entitled to ratification of the transaction?

Analysis: A transaction under section 536(2) may be protected only if it is bona fide and in the ordinary course of business. The facts showed that the transfer was given retrospective effect to precede an injunction restraining alienation, the consideration structure was suspicious, and the alleged payment of Rs. 30 lakhs to the bank was not shown to have been made by or for the applicant. The surrounding circumstances negatived bona fides and indicated an attempt to overreach the court's order.

Conclusion: The applicant was not a bona fide transferee and the transfer was not fit for validation.

Issue (iii): Whether the mortgage in favour of the bank was invalid for want of deposit of original title deeds or for alleged discrepancies in the property description?

Analysis: The applicant failed to establish that the original title deeds were never deposited. The bank's inability to produce the originals later did not negate the creation of the mortgage, especially when the charge had been registered under section 125 of the Companies Act, 1956. The alleged discrepancies in the extent of built-up area were also explained by the additional lease obtained by the applicant directly from the original owner, and did not invalidate the mortgage or the sale process.

Conclusion: The mortgage was valid and the objections based on description discrepancies failed.

Issue (iv): Whether the auction sale was liable to be set aside for failure to pay the bid amount within the stipulated time?

Analysis: Section 29 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 makes the Second Schedule to the Income-tax Act, 1961 applicable to recovery sales. Rule 57 requires immediate deposit of 25 per cent and payment of the balance within 15 days, while rule 58 provides the consequence of default. The successful bidder admittedly paid the balance over about four months, contrary to the auction terms and the statutory scheme. The Recovery Officer had no power to condone such non-compliance in the absence of a reserved clause.

Conclusion: The auction sale was liable to be set aside for non-compliance with the mandatory payment schedule.

Final Conclusion: The prayer to validate the transfer of leasehold rights failed, the mortgage was upheld, and the auction sale was found unsustainable for breach of the mandatory recovery-sale procedure; nevertheless, the present application was dismissed.

Ratio Decidendi: An application to validate a transaction under section 536(2) of the Companies Act, 1956 is governed by the residuary limitation period when no special period is prescribed, bona fides must be established by the transferee's conduct, and a recovery sale made in violation of mandatory statutory payment requirements is liable to be set aside.

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