2015 (8) TMI 93 - HC - Companies Law

High Court upholds pledge & transfer of shares as valid under Companies Act

Garware Marine Industries Limited, M/s. Henkel Chemicals (I) Ltd. Versus Garware Nylons Limited (In liquidation)

The High Court validated the pledge of shares and their subsequent transfer, deeming them bona fide and in the interest of the company under Section ... Validation of pledge of shares when winding up was initiated – Applicant by liquidating shares supplied raw materials and made payments to some of key contractors of Company - Official Liquidator's Report considered subject transfer of shares violative of Section 531A of Companies Act, 1956 having taken place within six months prior to commencement of winding up - Held that:- Considering agreement of pledge and its enforcement, it transpires that agreement appeared to be in ordinary course of Company's business and bona fide in interest of Company –Had it not been for this agreement, business of Company would have ceased – Once original pledge was held to be valid, its subsequent transfer of shares in favour of Applicant cannot be faulted on ground that it amounts to fraudulent preference or invalid transfer during pendency of winding up – Agreement of pledge as well as transfer of shares by executing transfer deeds in respect thereof evidently happened before winding up order – Mere fact that share certificates along with duly executed transfer deeds were not lodged with Company or that such transfers were not registered in record of Company does not detract from completeness of transfer – Thus, pledge of shares by Company in liquidation and transfer of shares effected during pendency of winding up were both bona fide and in interest of Company in liquidation –Official Liquidator's Report disposed of – Decided in favour of Applicant. Issues Involved:1. Validation of a pledge agreement under Section 536(2) of the Companies Act, 1956.2. Invocation of the pledge and transfer of shares.3. Compliance with Section 531A of the Companies Act.4. Bona fide nature and business interest of the transactions.5. Rights of creditors post-winding up order.Detailed Analysis:1. Validation of a Pledge Agreement under Section 536(2) of the Companies Act, 1956:The application sought validation of a pledge agreement, invocation of the pledge, and transfer of shares under Section 536(2) of the Companies Act, 1956. The High Court emphasized that any disposition of the property of a company made after the commencement of winding up is void unless the court orders otherwise. The applicant must prove that the transfers were bona fide and in the interest of the company. The court cited the case of Hindustan Transmission Products Ltd., affirming that the transfer must be in the best interests of the company to be validated under Section 536(2).2. Invocation of the Pledge and Transfer of Shares:The court considered the transactions as a composite one, where the original right in favor of the pledgee was created by an agreement of pledge. The subsequent enforcement of the pledge was deemed valid unless it contradicted the terms of the pledge. The court found that the agreement of pledge and its enforcement were in the ordinary course of business and bona fide in the interest of the company. The applicant continued to supply raw materials and make payments to critical contractors, ensuring the company's operations and business continuity.3. Compliance with Section 531A of the Companies Act:Initially, the Official Liquidator's report suggested that the transaction violated Section 531A of the Act, which addresses fraudulent preference. However, this ground was later abandoned, and the contest centered on Section 536(2). The court did not find any fraudulent preference, as the transactions were bona fide and in the interest of the company.4. Bona Fide Nature and Business Interest of the Transactions:The court observed that the transactions were entered into bona fide and in the ordinary and regular course of business. The agreement ensured the continuous supply of raw materials and the company's business continuity during the reference period before BIFR. The court noted that the Official Liquidator did not dispute these facts or impugn the initial transaction of the pledge of shares.5. Rights of Creditors Post-Winding Up Order:The court addressed the contention that no new rights could be created or incomplete rights completed after the winding-up order. It was argued that doing so would be contrary to the rights of creditors to have the proceeds of the company's assets distributed pari passu. However, the court found that the agreement of pledge and transfer of shares occurred before the winding-up order. The transfer was considered complete between the transferor and transferee upon the delivery of share certificates and duly executed transfer deeds, even if the formalities of registration in the company's records were pending.Conclusion:The High Court validated the pledge of shares and their subsequent transfer, finding them bona fide and in the interest of the company. The transactions were deemed valid under Section 536(2) of the Companies Act, 1956, and the objections of the Official Liquidator were dismissed. The court made the Company Application absolute in terms of the requested reliefs, vacating the order of status quo dated 15 December 2014, and disposed of the Official Liquidator's Report with no order as to costs.