2012 (4) TMI 436 - HC - Companies Law

Court dismisses application to declare sale null under Companies Act; former directors acted in good faith.

The court dismissed the application seeking to declare a sale null and void under Section 537 of the Companies Act. Despite acknowledging the sale during ... Prohibition on alienation of assets during pendency of winding up (Section 537) - bona fide payments by directors after disposal of company assets - role and exclusive authority of the Official Liquidator in distribution of assets - pari passu distribution of assets amongst secured creditors and workmenProhibition on alienation of assets during pendency of winding up (Section 537) - bona fide payments by directors after disposal of company assets - role and exclusive authority of the Official Liquidator in distribution of assets - Whether respondent Nos. 1 and 2 are liable to refund the portion of sale proceeds retained/paid by them from movables sold during the pendency of the winding up petition. - HELD THAT: - The Court found on the evidence that the movables belonging to the company were sold during the pendency of the winding up petition and that respondent Nos. 1 and 2 had disbursed the proceeds partly to a secured creditor and partly to a former employee. The Court noted that ordinarily disbursement and distribution of assets is the function of the Official Liquidator, and that alienation during pendency is impermissible; however, having regard to the admitted facts that respondent Nos. 1 and 2 made further payments from their personal funds after the winding up order (including payments to employees and to the Provident Fund Organisation) and that such payments exceeded the amount sought to be recovered, the Court held that a direction for refund against respondent Nos. 1 and 2 was not warranted in the peculiar facts of the case. The Court therefore declined to order repayment by those directors while recording that the normal course would vest the distribution function in the Official Liquidator. [Paras 6, 7, 8, 9]No direction to respondent Nos. 1 and 2 to refund the amounts recovered is issued in the facts of this case.Pari passu distribution of assets amongst secured creditors and workmen - role and exclusive authority of the Official Liquidator in distribution of assets - Whether respondent No. 4 (the secured creditor) must be directed to refund the Rs. 1,70,000 it received from the sale proceeds. - HELD THAT: - The Court recognised that the payment to respondent No. 4 occurred during the pendency of the petition and that, in principle, preferential payment to one creditor may be impermissible. Nevertheless, applying the rule of pari passu distribution and noting that no other secured creditor or claim presently appears on record, the Court concluded that an immediate refund order against respondent No. 4 was unnecessary. To protect the interests of potential claimants and to enable fair distribution, the Court directed respondent No. 4 to bear the Official Liquidator's advertisement expenses (capped) to invite claims. The Court left open the Official Liquidator's liberty to approach the Court for further directions if other secured creditors or workmen assert claims, at which stage appropriate orders against respondent No. 4 may follow. [Paras 10, 11]No present order for refund by respondent No. 4; respondent No. 4 directed to pay advertisement expenses for inviting claims and subject to future directions if other claims emerge.Final Conclusion: Application disposed of: no refund directed against respondent Nos. 1 and 2 in view of their bona fide payments and subsequent personal disbursements; no immediate refund directed against respondent No. 4, but respondent No. 4 ordered to bear advertisement expenses (subject to a cap) to enable the Official Liquidator to invite claims and the Official Liquidator is entitled to seek further directions if additional claims are made. Issues:Application under Section 537 of the Companies Act seeking to declare a sale as null and void, and to direct remittance of sale proceeds to the Official Liquidator.Analysis:The case involved an application by the Official Liquidator under Section 537 of the Companies Act, seeking to declare a sale during the petition period as null and void and to direct the remittance of sale proceeds. The company in question was ordered to be wound up, and the sale in question was made by the erstwhile directors of the company-in-liquidation. The applicant contended that the sale was contrary to the provisions of the Companies Act, specifically Section 537, and sought a refund of the sale proceeds. The respondents, the former directors, acknowledged the sale but argued it was made in good faith due to financial difficulties faced by the company. They claimed to have paid off a secured creditor and an employee from the sale proceeds. The matter proceeded to evidence, with documents presented by both parties. The evidence confirmed the sale of movables by the respondents post the filing of the winding-up petition. The respondents argued that they made payments even after the winding-up order to settle dues, indicating good faith efforts. The court noted the payments made by the respondents from personal funds towards settling outstanding amounts post-winding up. Considering these payments and the lack of claims against the Official Liquidator, the court held that a refund direction against the respondents was not warranted.The court further deliberated on the payment made to the secured creditor, amounting to Rs. 1,70,000, which was towards discharging the company's liability. Given the absence of other claims and the need for fair distribution of assets, the court directed the fourth respondent to bear advertisement expenses for inviting potential claims against the company-in-liquidation. The court emphasized that in the absence of other claims, no refund direction to the fourth respondent was necessary. However, the Official Liquidator was granted the liberty to seek directions if other claims emerged. The court disposed of the application in line with the observations, emphasizing fair distribution of assets without disturbing the present status.In conclusion, the judgment addressed the application seeking to declare a sale null and void under the Companies Act. It considered the circumstances of the sale, payments made by the respondents post-winding up, and the need for fair asset distribution. The court ruled against a refund direction to the respondents but directed the fourth respondent to cover advertisement expenses for potential claims, ensuring fair distribution if other claims arise.