2011 (10) TMI 512 - HC - Companies Law

Court rules Poddar Finance not a contributory in liquidation; share transfer void.

Podar Finance (P.) Ltd. Versus Official Liquidator

The court concluded that Poddar Finance Private Limited is not a contributory of Jaipur Spinning and Weaving Mills Ltd. in liquidation. The transfer of ... Winding up - Transfer of share – contributor or not - applicant-Poddar Finance is holding equity shares of M/s Jaipur Spinning and Weaving Mills Ltd. and the aforesaid shares were acquired from Shree Shakti Mills Limited on 25.1.1979 - applicant contended that in terms of section 428 of the Companies Act, 1956, the holder of fully paid up shares is deemed to be a contributory – Held that:- Petition for winding-up of Shakti Mills was filed on 25.4.1978 and shares in question were transferred thereafter on 10.5.1979. Transfer of shares in question in terms of section 536(2) after commencement of winding up proceedings of Shakti Mills is void. Since the transfer of shares in question is void in view of section 536(2) of the Act, the applicant-Poddar Finance cannot be treated to be a contributory. Issues Involved:1. Whether Poddar Finance Private Limited is a contributory of Jaipur Spinning and Weaving Mills Ltd.2. Validity of transfer of shares post commencement of winding-up proceedings.3. Compliance with the Companies Act provisions regarding the transfer of shares.4. Bona fide nature and valuation of the share transfer transaction.5. Role and obligations of the Official Liquidator in settling the list of contributories.Issue-wise Detailed Analysis:1. Whether Poddar Finance Private Limited is a contributory of Jaipur Spinning and Weaving Mills Ltd.:The Hon'ble Supreme Court directed the High Court to record a finding on whether Poddar Finance was a contributory. Poddar Finance argued that it holds 1,65,010 equity shares and 12,478 preference shares of Jaipur Spinning Mills, acquired from Shakti Mills, and thus should be deemed a contributory under section 428 of the Companies Act, 1956. The Official Liquidator contested this, stating that the list of contributories had not been settled and that Poddar Finance had not approached the Liquidator as a contributory. The Company Judge and Official Liquidator opined that Poddar Finance cannot be treated as a contributory due to the invalidity of the share transfer under section 536(2) of the Act.2. Validity of transfer of shares post commencement of winding-up proceedings:The transfer of shares from Shakti Mills to Poddar Finance occurred after the commencement of winding-up proceedings against Shakti Mills. Section 536(2) of the Companies Act states that any transfer of shares after the commencement of winding-up proceedings is void unless validated by the court. The court found that no application for validation was filed by Poddar Finance, making the transfer void. The transaction was also considered under-valued and not in the interest of creditors, further invalidating it under section 536(2).3. Compliance with the Companies Act provisions regarding the transfer of shares:The Official Liquidator noted non-compliance with sections 108A, 108B, and 108D of the Companies Act, which require prior approval/intimation to the Central Government for such transfers. The shares were transferred without following these statutory requirements, rendering the transfer void.4. Bona fide nature and valuation of the share transfer transaction:The transaction was scrutinized for its bona fide nature and valuation. The shares were transferred at a throwaway price, constituting 65% of the paid-up capital of Jaipur Spinning Mills, which was not in the interest of creditors. The court found the transaction grossly under-valued and not bona fide, considering the inter-se relationship of the Directors of the involved companies. The Official Liquidator of Shakti Mills also objected to the transfer, further questioning its validity.5. Role and obligations of the Official Liquidator in settling the list of contributories:The Official Liquidator argued that it was necessary for the ex-management to cooperate in settling the list of contributories and creditors. The court noted that the list of contributories had not been settled in accordance with sections 428 and 467 of the Act and Rules 180 to 196 of the Companies (Court) Rules, 1959. The Official Liquidator's report and the Company Judge's opinion both concluded that Poddar Finance could not be treated as a contributory due to the invalidity of the share transfer.Conclusion:The court concluded that Poddar Finance Private Limited is not a contributory of Jaipur Spinning and Weaving Mills Ltd. in liquidation. The transfer of shares was void under section 536(2) of the Companies Act, and no application for validation was filed. The transaction was under-valued and not in the interest of creditors, further invalidating it. The misc. application no. 49/2011 filed by Poddar Finance was dismissed, and the finding was sent to the Hon'ble Supreme Court in compliance with the order dated 11.3.2011.