Court Requires Leave for Pledge Enforcement, Shares Revalued, Disposition Conditions Imposed

The court concluded that ICICI Bank India or the Purchaser needed to obtain leave before enforcing the pledge, but the transaction was deemed bona fide. The shares were to undergo fresh valuation, with any additional consideration benefiting Zylog. The Purchaser was directed to fulfill these requirements, or the disposition would be voided. Both applications were disposed of, allowing parties to return if needed, with no costs awarded.

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Issues Involved:

1. Validity of the transfer of shares of Brainhunter Systems Limited.
2. Requirement of leave under Sections 536 and 537 of the Companies Act, 1956.
3. Bona fide nature of the transaction.
4. Valuation of shares.
5. Role of the Official Liquidator.
6. Consequences of not obtaining leave.

Detailed Analysis:

1. Validity of the Transfer of Shares:
Comp.A.No.859 of 2017 was filed by Zylog Systems Limited (Zylog), represented by its Administrator, to set aside the transfer of 7,000,100 shares of Brainhunter Systems Limited (Brainhunter) to Quess Corporation Limited (Quess Corp). Comp.A.No.359 of 2019 was filed by Quess Corp seeking validation of the purchase of these shares, which were held by Zylog, upon enforcement of the pledge by ICICI Bank Limited, India (ICICI Bank India) on 23.10.2014.

2. Requirement of Leave under Sections 536 and 537 of the Companies Act, 1956:
The primary legal question was whether a secured creditor requires leave under Section 537 of the Companies Act, 1956 (CA 1956). The court examined Sections 536 and 537 of CA 1956, which deal with the avoidance of transfers and the requirement of leave for attachments, executions, or sales after the commencement of winding up. It was concluded that ICICI Bank India required the leave of the Court after the amendments to CA 1956 by Act 35 of 1985, which created a pari passu charge in favor of workmen of the company in liquidation.

3. Bona Fide Nature of the Transaction:
The court considered whether the transaction was bona fide. It was noted that the creation of the security by way of pledge and the call on the pledge were bona fide. However, the enforcement of the pledge was completed subsequent to the order of appointment of the Official Liquidator as Provisional Liquidator. The court inferred that the Purchaser was probably aware that the pledgor was a company in liquidation and should have requested leave before enforcing the pledge.

4. Valuation of Shares:
One significant consideration was whether the valuation was reasonable. The court noted that the investment of Zylog in Brainhunter was about 35-40 million CDN $ in the form of equity and debt. The valuation report produced by the Purchaser valued the shares at CDN $ 100,000 to 125,000 using the discounted free cash flow method (DCF). The court opined that if leave had been requested, it would have insisted that the transaction be consummated at the upper end of the valuation band.

5. Role of the Official Liquidator:
The Official Liquidator was required to take into custody all properties and effects of the company upon the appointment of a provisional liquidator. The court emphasized that the Official Liquidator represents the interests of all stakeholders of a company in liquidation, except the secured creditor seeking to enforce the security by standing outside the winding up. The necessity to involve the pledgor was obviated by having a power of attorney executed in favor of the Security Trustee.

6. Consequences of Not Obtaining Leave:
The court concluded that ICICI Bank India or the Purchaser was required to obtain leave of the Court before enforcing the pledge. The transaction was deemed bona fide but required contingent validation subject to conditions precedent. The court directed that the shares should be subject to fresh valuation as on the date of acquisition by the Purchaser. The entire additional consideration, if any, should accrue to the benefit of Zylog. The disposition in favor of the Purchaser was validated subject to the fulfillment of these requirements. If the requirements were not fulfilled, the disposition would be declared void.

Conclusion:
The applications were disposed of on the terms that the shares be subject to fresh valuation, with the differential consideration accruing to Zylog. The Purchaser was required to file an application before the Court to conclude the transaction in terms of the order. The court granted leave to all parties to approach subsequently if necessary. There was no order to costs.

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