2018 (1) TMI 1223 - HC - Companies Law

Court affirms dismissal of sale application under Companies Act, emphasizing transparency, equality among creditors.

VGP Finances Limited Versus The Official Liquidator, High Court Madras, as Liquidator of Neptune Inflatables Limited, (In Liquidation) And Asset Reconstructions Company (India) Ltd.

The Court upheld the learned Single Judge's dismissal of the application under Section 536(2) of the Companies Act, 1956, regarding the sale of property ... Application filed by the appellant u/s 536(2) to validate the sale of the property in its favour by the company in liquidation - Held that:- The preponderance of probability is that VGP was always aware of the fact that the state of health of Neptune has precarious and in order to save the promoter-directors of Neptune from difficulty and, perhaps, to further their interest agreed to enter into the impugned sale transactions. The impugned sale transactions were clearly motivated by the fact that the exposure, if any, of VGP could be secured by giving it the first bite in the assets of Neptune. VGP was a preliquidation creditor and therefore, by this device, cannot be allowed to steal a march over other creditors. The exposure of ARCIL as on 16.11.2010 (which is the date when OL submitted his report) is a sum of ₹ 2,18,23,829/-, and if dues of other statutory and unsecured creditors are included, the debt of Neptune balloons to ₹ 3,36,16,855.38/-.OL is yet to call for claims. There is, therefore, every likelihood that there may be other unsecured creditors whose claims qua Neptune may be outstanding. The impugned sale transaction were not, as held by the learned Single Judge, either carried out to benefit Neptune or, were transactions, which helped Neptune to conduct its day-to- day operations. Therefore, for all these reasons, we are disinclined to interfere with the impugned order. Accordingly, the appeal is dismissed. Issues Involved:1. Validity of the learned Single Judge's dismissal of the application under Section 536(2) of the Companies Act, 1956.2. Whether the sale of the property by the company in liquidation to the appellant should be validated.3. Examination of the transactions' bona fides and whether they were in the ordinary course of business.4. Consideration of the interests of secured and unsecured creditors.5. Adequacy of consideration for the sale transactions.6. Compliance with legal procedures and disclosure in financial statements.Issue-Wise Detailed Analysis:1. Validity of the learned Single Judge's dismissal of the application under Section 536(2) of the Companies Act, 1956:The primary question was whether the learned Single Judge was correct in dismissing the appellant’s application under Section 536(2) to validate the sale of the property by the liquidated company. The Court noted that the learned Single Judge had dismissed the application based on the analysis that the transactions were not in the interest of the company or its creditors.2. Whether the sale of the property by the company in liquidation to the appellant should be validated:The Court examined the transactions and found that they were executed after the winding-up petition was filed and without the permission of the Company Court. The transactions were deemed not to be in the ordinary course of business and were executed under suspicious circumstances, suggesting collusion to deprive other creditors of their dues.3. Examination of the transactions' bona fides and whether they were in the ordinary course of business:The Court analyzed whether the transactions were honest and bona fide. It was found that the transactions were not carried out in the ordinary course of business, as they were executed after the winding-up petition was filed and without securing the interests of all creditors. The transactions were designed to favor the appellant over other creditors.4. Consideration of the interests of secured and unsecured creditors:The Court emphasized the need to maintain equality among creditors. The transactions were found to violate this principle, as they favored the appellant over other creditors, including secured and unsecured creditors. The Court highlighted the importance of considering the claims of all creditors before validating any transaction.5. Adequacy of consideration for the sale transactions:The Court found that the sale consideration was significantly undervalued. The property was sold for a cumulative value of Rs. 5,43,260/-, whereas it was purchased for Rs. 7,72,000/- just over two years earlier. The Court noted that the market value of the property should have increased over time, not decreased. This undervaluation indicated that the transactions were not conducted in a fair and reasonable manner.6. Compliance with legal procedures and disclosure in financial statements:The Court observed discrepancies in the financial statements of the company. The loan advanced by the appellant was not reflected in the balance sheets for the relevant periods, raising doubts about the transparency and bona fides of the transactions. The Court also noted that the mortgage deed and sale deeds were executed in a manner that deprived the state of valuable revenue, further questioning the legitimacy of the transactions.Conclusion:The Court concluded that the transactions were not bona fide, were not in the ordinary course of business, and were executed to favor the appellant over other creditors. The learned Single Judge's dismissal of the application under Section 536(2) was upheld, and the appeal was dismissed. The Court emphasized the need to protect the interests of all creditors and ensure that transactions are conducted in a fair and transparent manner.