2020 (1) TMI 594 - HC - Companies Law

Court Invalidates Transactions in Winding-Up, Orders Refund

The court declared transactions between M/s. GOL Offshore Limited and M/s. Arambhan Hospitality Services Limited as void under Section 536(2) of the ... Commencement of winding up deemed from presentation of petition - disposition of property after commencement of winding up - voidness under Section 536(2) of the Companies Act, 1956 - burden on person seeking validation to plead and prove ordinary course of business and benefit to the company - effect of appointment of provisional liquidator and vesting of assets in liquidator - court's power to validate post-commencement transactions only if for benefit of companyCommencement of winding up deemed from presentation of petition - effect of appointment of provisional liquidator and vesting of assets in liquidator - Date of commencement of winding up and its legal consequences for subsequent transactions - HELD THAT: - The Court held that the winding up of the respondent company is deemed to have commenced on presentation of the winding up petition on 28th August, 2014. Once deemed to have commenced, transfers and dispositions made thereafter fall within the statutory regime governing companies in liquidation and, upon appointment of a provisional liquidator, the assets and control vests in the provisional/official liquidator. The court relied on the statutory scheme and precedents to conclude that transfers after commencement cannot create new rights adverse to creditors or complete uncompleted rights inconsistent with the liquidator's duty to gather assets for pari passu distribution. [Paras 28, 37, 38]Winding up deemed to have commenced on 28th August, 2014; assets and control vest in the provisional/official liquidator upon appointmentDisposition of property after commencement of winding up - voidness under Section 536(2) of the Companies Act, 1956 - court's power to validate post-commencement transactions only if for benefit of company - Whether payments made under consent terms after commencement of winding up are void unless validated by the Court - HELD THAT: - The Court applied Section 536(2) to hold that dispositions of company property after commencement of winding up are void unless the Court otherwise orders. The Official Liquidator is not required to plead fraud; the statutory provision renders such transfers void ab initio unless the person seeking validation demonstrates that the transactions were in the ordinary course of business and for the benefit of the company. The Court reiterated settled principles that validation is an exceptional remedy exercised only where the transfer keeps the company going or is demonstrably for its best interest and the creditors' pari passu rights are not prejudiced. [Paras 34, 36, 38, 40]Payments made after commencement are void under Section 536(2) unless the person seeking validation pleads and proves ordinary course and benefit to the company; burden lies on that personBurden on person seeking validation to plead and prove ordinary course of business and benefit to the company - court's power to validate post-commencement transactions only if for benefit of company - Whether the applicant proved entitlement to validation of the consent terms and payments received - HELD THAT: - On the facts the Court found that the applicant failed both to plead sufficiently and to prove that the consent terms executed on 24th October, 2016 and the payments received thereafter were in the ordinary course of business or for the benefit of the respondent company. The Court noted that many invoices and transactions were post-commencement, that two payments were made after appointment of the provisional liquidator, and that the Official Liquidator had received numerous claims including secured creditors whose priority would be affected. Applying the legal tests, the Court concluded that validation was not justified. [Paras 29, 30, 35, 41, 42]Applicant failed to discharge the burden to validate the post-commencement transactions; consent terms and payments are not validatedFinal Conclusion: The Official Liquidator's report is allowed; the Company Application for validation is dismissed; the applicant is directed to deposit the sums received under the consent terms with the Official Liquidator (with interest) as the transactions made after commencement of winding up are void and the applicant failed to prove they were in the ordinary course and for the benefit of the company. Issues Involved:1. Declaration of transactions as void under Section 536(2) of the Companies Act, 1956.2. Validity and binding nature of consent terms dated 24th October 2016.3. Refund of Rs. 4,07,99,612/- to the Official Liquidator.4. Ratification of payments made by the company in liquidation.Issue-wise Detailed Analysis:1. Declaration of Transactions as Void under Section 536(2) of the Companies Act, 1956:The Official Liquidator of M/s. GOL Offshore Limited (in liquidation) sought a declaration that payments made by the company to M/s. Arambhan Hospitality Services Limited between 10th October 2016 and 14th June 2017 were void under Section 536(2) of the Companies Act, 1956. It was argued that these transactions occurred after the commencement of winding-up proceedings, which began on 28th August 2014. The court held that any disposition of property after the commencement of winding-up is void unless the court orders otherwise. The applicant failed to prove that the transactions were in the ordinary course of business or in the best interest of the company. Consequently, the transactions were declared null and void.2. Validity and Binding Nature of Consent Terms Dated 24th October 2016:M/s. Arambhan Hospitality Services Limited sought validation of the consent terms dated 24th October 2016, arguing that they were executed in the ordinary course of business and were beneficial for keeping the company as a going concern. However, the court found that the applicant did not sufficiently plead or prove that the consent terms were in the ordinary course of business or in the best interest of the company. The court noted that the consent terms were filed after the commencement of winding-up proceedings and payments were made post the appointment of the provisional liquidator. Thus, the consent terms were not validated.3. Refund of Rs. 4,07,99,612/- to the Official Liquidator:The Official Liquidator sought a direction for M/s. Arambhan Hospitality Services Limited to refund Rs. 4,07,99,612/- received from the company in liquidation. The court agreed with the Official Liquidator’s contention that these payments were made after the commencement of winding-up proceedings and were thus void under Section 536(2). The court ordered M/s. Arambhan Hospitality Services Limited to deposit the sum of Rs. 4,07,99,612/- with the Official Liquidator within four weeks, with interest at 9% per annum from the date of recovery.4. Ratification of Payments Made by the Company in Liquidation:M/s. Arambhan Hospitality Services Limited argued for the ratification of payments made by the company in liquidation, claiming they were made under compelling circumstances and were in the ordinary course of business. The court, however, found that the applicant did not provide sufficient evidence to prove that the transactions were in the ordinary course of business or beneficial for the company. The court emphasized that the burden of proof lies on the applicant to show that such transactions were in the best interest of the company, which the applicant failed to do. Consequently, the court did not ratify the payments.Conclusion:The court concluded that the transactions and consent terms were not in the ordinary course of business and were not in the best interest of the company in liquidation. The Official Liquidator’s request to declare the transactions as void was granted, and M/s. Arambhan Hospitality Services Limited was directed to refund the amount received with interest. The company application filed by M/s. Arambhan Hospitality Services Limited was dismissed.