Winding up transactions and creditor equality: post-commencement borrowings were not validated because they lacked bona fide business justification.

Post-commencement dispositions of a company's property in winding up are void unless the court validates them. Validation is confined to bona fide transactions entered into and completed in the ordinary course of current business, or transactions necessary to preserve the company as a going concern. The controlling consideration is protection of pari passu distribution among creditors and avoidance of improper preference. On the facts, the borrowings were not shown to be ordinary trading transactions or genuine salvage measures, and the company was no longer effectively able to continue business. The application for validation under Section 227(2) therefore failed.

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Issues: Whether the charge created after commencement of winding up could be validated under Section 227(2) of the Companies Act.

Analysis: A disposition of a company's property after commencement of winding up is void unless the court otherwise orders. The validating power is exercised only for bona fide transactions entered into and completed in the ordinary course of the company's current trade, or where the transaction is necessary to preserve the business as a going concern. The governing consideration remains equal treatment of creditors and protection of pari passu distribution. On the facts, the company was effectively unable to continue business after the winding up proceedings had progressed, and the borrowings were not shown to be for ordinary trading or genuine salvage purposes. The evidence did not justify treating the transaction as one warranting protection.

Conclusion: The transaction was not fit for validation under Section 227(2) and the application failed.

Ratio Decidendi: Post-commencement dispositions in winding up are validated only when they are bona fide, made in the ordinary course of business, or necessary to preserve the company as a going concern, and not when they improperly prefer one creditor over the general body of creditors.

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