Fraudulent preference in winding up barred enforcement of a consent decree and preserved pari passu distribution.

Once winding up is deemed to have commenced, a creditor cannot obtain or retain a preferential recovery through a consent decree that disturbs pari passu distribution in liquidation. Applying Section 441 of the Companies Act, 1956 with Section 20 of the Sick Industrial Companies (Special Provisions) Act, 1985, the Bombay HC treated winding up as commencing on the BIFR recommendation date, so the consent terms and decree were entered after commencement. On that basis, the Court held the recovery to be a fraudulent preference, refused leave under Section 446 to enforce the decree, and upheld the direction to refund the amount with interest, while leaving the creditor to prove its claim before the Liquidator.

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Issues: Whether the consent decree and the recovery made under it amounted to a fraudulent preference in the course of winding up, and whether leave under Section 446 of the Companies Act, 1956 could be granted to enforce the decree.

Analysis: The winding up was held to have commenced on the date when the BIFR recommended winding up, by applying Section 441 of the Companies Act, 1956 together with Section 20 of the Sick Industrial Companies (Special Provisions) Act, 1985. On that footing, the consent terms and decree were entered into after commencement of winding up. The Court found that the appellant, being connected with the group and having secured an onerous interest structure inconsistent with the original loan arrangement, obtained payment in preference to other creditors and contrary to the scheme governing distribution in liquidation. The Court further held that the surrounding circumstances supported the finding of fraudulent preference and that the appellant could still prove its claim before the Liquidator, but could not enforce the impugned preference.

Conclusion: The refusal of leave under Section 446, the declaration that the consent decree was illegal and void as a fraudulent preference, and the direction to refund the amount with interest were all upheld.

Final Conclusion: The appeal failed because the impugned transaction was treated as an impermissible preferential recovery after the commencement of winding up, leaving the appellant to pursue its claim only in accordance with the liquidation process.

Ratio Decidendi: Once winding up is deemed to have commenced, a creditor cannot secure and retain a preferential recovery through a consent decree or similar arrangement that disrupts the statutory scheme of pari passu distribution in liquidation.

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